infineeti annual edition- august 2014

InFINeeti | Annual Issue | August 2014


Dear Friends,

Greetings from Team InFINeeti…

A lot has changed since the last time we interacted. A new government has been formed, the Union budget has been pre-

sented, the Sensex has touched a new high of 25000 and many more events. Before the elections, a slogan from BJP’s

national campaign had become famous, “ Ache Din Aane Wale Hai”. The masses have voted for the party and after three

decades, a single party has won a majority in the Parliament. There were high expectations from the new government.

The first test of the new government was to present a balanced budget which clearly lays down the roadmap for econom-

ic growth in India in both- short and long term. So, our theme for the magazine this time is based on the slogan of BJP:

“Union Budget: Has budget met the expectations of Ache Din ?“

Technology, nowadays, is touching every sphere of business. Banking is no exception. We have tried to analyse the role of

technology in shaping the banking industry. Also, we are hearing about GST for long enough. One of our articles analyses

the future of GST in India. Many people believe that the one of the reasons for the fall of the last government can be

attributed to populist schemes by the centre and corruption emanating from those schemes. We have tried to analyse

whether populism or rational economic policies work in the longer term.

Financial sector is in dire need of reforms. Most of the laws are archaic and date back to the Stone Age. In this backdrop,

FSLRC committee was formed which tabled its recommendations. One of our articles analyses the recommendations

made by the committee. In our constant tryst to innovate, we have tried to amalgamate two unrelated events into one.

One is the recently concluded FIFA World Cup and the other one is M&A. How football and M&A can be related? We have

an interesting article on it. The magazine also contains the analysis of dividend distribution tax and FDI in Insurance, and a

discussion on whether they are good or not. This is the time of the year when B-school students have returned from their

summer internship. So, we have captured the experience of one of our colleague regarding how summer internships are

important to understand the nuances of business in a MBA student’s life. We then have tried to get an insight into the

Indian Agriculture sector and Rural Finances by conducting an interview with a dignitary from NABARD. We have also in-

cluded an article on implementation of IFRS in India.

Besides the insightful articles, the edition also features regular columns like FIN Trivia, FIN-lingos and News Chronicles.

We have also added a new regular column on equity research. We hope readers will find it useful.

From the next time onwards, the readers will be greeted by our new team and we, the current team, have a sense of

pleasure, pride and at the same time are poignant as it was an excellent opportunity given to us to handle this esteemed

magazine. We hope that we have done a good job.

Till then we hope that you will enjoy reading this annual budget edition.

Do write to us regarding any suggestions, feedbacks or recommendations.

Goodbye & Happy Reading !!!

FROM THE EDITOR’S DESK 3


CONTENTS 2 CONTENTS 4

>>> Page 26 >>> Page 36 >>> Page 56

Football & M&A:

A comprehensive analysis of M&As using football as an analogy

5

Budget plus 3.0: Highlights of post budget analysis at IIFT

9

Future of gst: Advantages & disad-vantages of imple-menting GST

12

Top events of 2014: Review of important events of 2014

24

Role of technology in banking:

Analysis of role of tech-nology in changing the past, present & future of banking industry

26

COVER

STORY

ANALYSIS OF THE

UNION BUDGET

“Does the budget meet the expectations of Ache Din“

18

Fslrc recommenda-

tions:

How FSLRC recommenda-

tions can bring much

needed reforms in finan-

cial sector

45

EXPERT SPEAKS

FIN LINGOS 16 EQUITY RESEACRH PRE-CURSOR

36

49

Ifrs implementation in india:

Benefits of adopting IFRS

53

NEWS CHRONICLE

Regulars

40

Dividend distribu-tion tax:

How taxing dividends is

useful to government.

Are they really benefi-

cial?

32

Faculty’s corner:

FDI in Insurance

Populism: A neces-sary evil?

Ill-effects of populist measures

Summer internship experience:

Shubham Agarwal shares his RBI experience

61

56

60

63 FIN TRIVIA


5

INTRODUCTION

Football has often been used as a powerful image

representing hope, as a vehicle that binds people and

encourages them to function as one, giving them a

sense of purpose and direction. There is even an ad-

vertisement that shows kids playing football with a

rag ball in a poverty stricken locality in Africa, a strong

testament to the overwhelming sentimental appeal

and sway that football holds over the masses. Club

football has cashed in on this popularity and has

transformed itself into elaborate money making ma-

chine that is on par with the leading corporate giants

of present day, in terms of revenue streams and mar-

keting campaigns.

SOURCES OF REVENUE

How do soccer clubs make money? It is a very simple

question that many fans of the game often wonder

and postulate but seldom fully understand. Most first

answers to this question would be match-day sales,

but there are those with a deeper understanding of

the industry that know that this is not quite the full

story. Deloitte’s Football Money League reports the

revenue of top football clubs by broadly classifying

the revenue into 3 main segments: Match-day Reve-

nue (gate receipts), Broadcasting Revenue (domestic

and international), and Commercial Revenue

(sponsorship and merchandise). As per a 2013 report,

Real Madrid earned revenue of $675 million during

the last year and has a team value of $3 billion as of

May 2014, of which $1.12 billion (32.6%) is to be

earned through commercial sources, another $1.12

billion from Broadcasting, $710 million (20.6%)

through Match Day revenue and the remaining $484

million through brand value.

It is important to understand the growing similarity

between corporates of the financial world and foot-

balling clubs. For the latter, assets are-players, broad-

cast rights, kit sponsorship deals and franchise deals,

and these are used by the club to make money, not

so markedly different from the way corporates make

money. Another curious similarity that can be struck

is the concept of mergers and acquisitions (M&A).

FOOTBALL PLAYER TRADE VIS-À-VIS

CORPORATE M&A

BY-BRAJESH M & NITESH SINGH, IIFT


6

The idea of M & A, though in circulation for a long

time, has started gaining purchase over the past few

months, with several big ticket deals being an-

nounced; Whatsapp- Facebook, Shire-Abbvie, Myntra-

Flipkart, to name a few.

FOOTBALL TRANSFERS AND CORPORATE M&A

The footballing world is no stranger to the idea of

M&A, though in an entirely different context. It is not

possible for football clubs to buy each other, so acqui-

sitions are limited to people: the manager, the players

and the marketing and support staff. In fact, the

transfer market, which facilitates the acquisition of

players, is the most talked about topic when transfer

windows open, and is fuelled by incessant speculation

and hectic negotiations. Before we further develop

this analogy, let’s take a step back and try and under-

stand why companies in the financial world go in for

M&A. Though the reasons for such activities would

vary from case to case, they can be broadly grouped

under a few categories, like capability enhancement,

expansion into other markets, reduction in competi-

tion, financial survival etc. A close examination of

transfer deals in football reveals striking similarities

with these points.

CAPABILITY EXPANSION

Capability expansion refers to a company’s efforts in

shoring up its resources and improving resistance to

possible weaknesses. One of the major reasons be-

hind acquisition is to appropriate some capability that

the target company has and that the acquirer wanted

or needed. Comcast’s 2002 acquisition of AT&T

Broadband (so it could offer more comprehensive tel-

ecommunications services) and Walt Disney’s 2006

acquisition of Pixar (to extend its animation capabili-

ties and add new films it could market to its estab-

lished audience) come under this bracket. Premier

League clubs have spent more than £4.4bn on players

since the transfer window was introduced 12 years

ago with this summer's spending set to cross £500m.

Post 2008, when Abu-Dhabi-based oil magnate Sheikh

Mansour bin Zayed Al-Nahyan bought Manchester

City FC, the club’s total cash outlay was £930.4m, of

which only £365.3m was generated from their own

operations. Chelsea’s acquisition of Diego Costa is a

clear indication of Mourinho’s intention to adding

some firepower to his long depleted strike force, and

providing support to Fernando Torres who often cuts

a lone figure up front. Luke Shaw’s move to Manches-

ter United to plug deficiencies in left back can also be

viewed similarly. Other familiar names among big

spenders are Barcelona and Real Madrid, who are

constantly on the lookout for promising new talent, to


maintain their reputation of being football power-

houses. Roman Abramovich's billions have made Chel-

sea the Premier League's biggest spenders over the

past decade with £681m going on transfer fees.

EXPANSION

Another main motivation behind M&A is to expand

into a new geographic location. Examples include the

acquisition of Lucent (U.S.) by Alcatel (France) in 2006,

Bharti’s deal with Zain to buy the Kuwaiti firm's mobile

operations in 15 African countries in 2010 and South

African Breweries’ purchases of Miller (U.S.) in 2002

and Bavaria Brewery (Colombia) in 2005. Extrapolating

this argument to the world of football, a club’s mone-

tary fortunes are linked to the following that it enjoys

across the world.

The more popular a club is throughout the world, the

more point of sale opportunities it will have for fans to

purchase merchandise, thereby filling the coffers of

the football club. It would be pertinent to talk about

Manchester United’s efforts in building up a fan base

in Asia, ranging from official websites in local lan-

guages (manutd.cn, manutd.jp) to tie ups with local

mobile networks for access to free content. All of their

promotional advertisements feature Shinji Kagawa,

their Japanese midfielder, in an attempt to connect

with their fans in Japan. Another instance of clubs try-

ing to build their image in new markets is the estab-

lishment of soccer training camps and youth leagues,

as entry points to an expansion in the future.

Many a times, the rationale behind M&A is to expand

your market share by buying out competition. Acquisi-

tion of Thums up by Coca Cola in 1993 falls under this

category. Thums Up had an 85% market share when

sold, and it made sense for Coca Cola to swoop in and

bring Thums Up under its wings. There are endless

examples for this when it comes to football. A case in

point is Borussia Dortmund’s midfielder Mario Gotze’s

move to rivals Bayern Munich last summer, followed

by striker Robert Lewandowski’s exit to the same club.

Juan Mata‘s move to Manchester United constitutes a

rather curious move by Chelsea to purportedly make

life difficult for its contenders Arsenal, Liverpool and

Manchester City.

7

Source:www.wowtechy.com

Source: www.thesportsbank.com


LEVERAGED DEALS

Many M&A deals take shape of a leverage deal in

which the whole, or a part of a struggling business

entity is taken over by an acquirer, often one aligned

with its field of work, so as to open up the possibility

of collaboration with the acquired business. Mi-

crosoft’s acquisition of Nokia, Sun Pharmaceuticals’

taking over of struggling Ranbaxy are examples for

the same.

A lot of football clubs resort to this measure so as to

avert the risk of financial crisis. Cash strapped Ju-

ventus, for instance, is trying to make some money

out of the significant interest that the other clubs

have in key midfielder Arturo Vidal. Chelsea veteran

Frank Lampard being offloaded to rivals Manchester

City, is akin to companies getting rid of streams that

are no longer considered core to their business.

CONCLUSION

Having talked of M&A in companies and their similari-

ties with transfers in Football, it is important to sound

a word of caution; the path to a successful deal is lad-

en with numerous obstacles in all shapes and sizes.

Instances of failed deals and failed transfers are many

in number; America Online (AOL) and Time Warner in

2007, Sprint and Nextel Communications in 2005,

Motorola and Google (2012); the list is depressingly

long. A Forbes article states that the probability of

success of an M&A deal is about 50%, a coin toss. The

football world is also replete with instances of failed

transfers; Marouane Fellaini to Manchester United,

Fernando Torres to Chelsea, Andriy Shevchenko to

Chelsea, Mario Balotelli to Manchester City. It is

therefore imperative to understand to the last detail,

the implications of a possible merger, or a player ac-

quisition, for a deal once signed cannot be undone so

easily.

Source:www.etoro.com/www.manutd24.com

Source: www.iamwire.com

8


OVERVIEW

The third edition of the annual budget analysis ses-

sion, Budget Plus 3.0, was organized at Indian Insti-

tute of Foreign Trade, Kolkata. The esteemed discus-

sion panel included Dr. K. Rangarajan, Head, Kolkata

Center, Dr. Ranajoy Bhattacharyya, Professor of Eco-

nomics, IIFT, Dr.Saikat Sinha Roy, professor of eco-

nomics, Jadavpur University, Mr.Pankaj Agarwal and

Mr.Akash Mansinka from Ernst and Young. The discus-

sion was moderated by Dr. Bibek Ray Chaudhuri, Pro-

fessor, IIFT.

Dr. K Rangarajan welcomed everyone and said that

the Budget affects everyone from a housewife to a

business tycoon and how everyone has diverse views

on it. He added that IIFT has invited academicians,

faculty and industry experts to have a discussion on

the budget and what it holds for every one of us.

The Student Body gave an enlightening presentation

on the highlights of the budget. It was a succinct over-

view, throwing light on the various schemes and initi-

atives taken by the Government. Dr. Bibek Ray

Chaudhuri threw light on the “developmental per-

spectives” and spoke on how he looked forward to

the economy getting back on track with “higher

growth, stable inflation and prudent policy system”,

9

http://cc.iift.ac.in/docs/iift/profile.asp?id=7





although the Consumer Price Index, being double-

digit, was still a major issue of concern. The Budget

lays out the roadmap to achieve a growth rate of 7-

8%. According to him, “The Government is targeting

small savings".

Dr.Saikat Sinha Roy analyzing the budget

Dr.Saikat Sinha Roy spoke as to how, for the last two

years, the economy has not been performing well.

The trust of the investors in the Economy needs to

be restored. According to him, the budget “is a docu-

ment of intent”. The current government manifesto

included the need for an overhaul of infrastructure

by which the Government will get revenue. He said

that subsidies should be phased out “for the Indian

economy to compete with the other economies”.

Although the current government is perceived to be

“industry friendly, yet retrospective taxes have not

been taken off”. According to him, one of the fea-

tures of the budget different from the earlier ones is

that most of the changes are for more than two

years and no timeline has been specified. Moreover

tax benefits have been given to the industries that

have their own power units. Dividend distribution

tax, the tax paid by a company on its dividends paid,

“needs to be grossed up".

Students listen as experts dissect every aspect of the budget

Mr. Pankaj Agarwal spoke on the indirect taxes which

comprises the customs, excise and service tax. He en-

lightened the gathering on how Service Tax, though

introduced only in 1994, garners the highest tax reve-

nues for the Government.

He also pointed out the initiatives taken to incentivize

the use of renewable energy resources. The decision

of the Government to levy taxes on the services pro-

duced by the educational institutes will add to the

revenues of the Government.

Dr. Ranajoy Bhattacharya took a different stance from

the other panelists and remarked that he was

“disappointed by the budget”. He said that the Gov-

ernment had missed a huge opportunity. Having been

elected with an “overwhelming mandate”, it

10


was time to take some hard measures. According to

him, the budget was a “pure eyewash”. He questioned

the transparency of the Government and its attempt to

“surreptitiously reduce expenditure behind the

scenes”, referring to the reduction in the expenditure

on Agriculture, Rural Development and Social sector.

He remarked that “Agriculture is the main bottleneck

in India” and enlightened us on the fact that Agricul-

ture employs 55 percent of the population yet ac-

counts for only 14 percent of the GDP. This structural

flaw needs to be addressed.

The audience, comprising of students from IIFT, were

very participative and had various questions ranging

from the duration of the long term capital gains to

increasing FDI in defense.

The panel concluded that though the budget was

“welcoming”, yet more was expected of it. They

called in for “simpler tax administration” that would

lead to larger tax compliance.

All in all, the session was quite enriching and informa-

tive as students, both from the first year as well as

from the second year got to understand the nuances

of the budget and also understood how to dissect the

nitty-gritty of the budget. So, from next time onwards

they would know what to look for in the budget and

would be in a better position to analyze it.

-By Mohd Zeeshan - IIFT

11


INTRODUCTION

The most awaited Goods and Services Tax (GST), a

major reform in the Indian taxation system with re-

spect to indirect tax, has been announced in the Un-

ion Budget of 2014. Every industry is looking forward

to this transformation with the positive hopes. There

are questions in the minds of people from every sec-

tor of economy regarding the impact of the changes

that would be brought by GST. The manufacturers,

wholesalers, retailers and the consumers are waiting

to know their stake associated with the reform.

BACKGROUND

The current tax system is inefficient and complicated

due to the tussle between the central and the state

governments to generate maximum revenue for

them. Central government levies tax on the manufac-

ture of goods through CENVAT, on services through

Finance Act and on the sale of goods through Central

Sales Tax Act (CST). States again levy taxes on the

sales of good that is independent of the tax levied by

the Centre. This multi-layered tax system leads to the

cascading effect on the indirect taxation system.

However, after the introduction of VAT in 2005, the

cascading effect has been reduced to a certain ex-

tent. Moreover, the bulk of the tax revenue goes to

the central government. So in order to compensate

the state government it levy multiple indirect taxes

on the revenue generated from goods, for example

inter-state sales tax, octroi etc.

The proposed GST is aimed at replacing multiple indi-

rect taxes like central excise, VAT, service tax with the

common taxation system. And this can have major

implications on the Indian economic growth. GST

would bring in higher revenue for the government by

broadening the tax base and minimizing exemptions.

This would also redistribute the tax burden equitably

between the manufacturing and the service industry.

THE PROPOSAL OF DUAL GST

The current proposal of dual goods and service tax

will not distinguish between goods and services. And

the central and the state GST would be levied on the

taxable value of the transaction. Except few assump-

tions, all the goods and services would be covered

under this scheme.

Currently the indirect taxes on goods is around 20%

and services are taxed at around 10%. But once the

GST– IS THERE ANY

FUTURE?

BY- SNEHA SHRIVASTAVA,

IIM-RAIPUR

12


The cascading effect of multistage taxation in the supply chain

GST is implemented, the final rate for GST is expected

to be around 14-16%. Further, the proposal has been

put for the dual tax structure which will impose single

tax rate for services and multiple tax rates for the

goods.

WHAT WILL EXACTLY HAPPEN?

The implementation of the goods and services tax

would impose a single tax on the goods and services.

At the end the amount of tax the consumer has to

pay will remain almost same in the short run. But the

distribution of taxes would be equal on both the

manufacturing and services sector. This will reduce

the extra burden that the manufacturing sector is car-

rying. Moreover, it will broaden the tax base by mini-

mizing exemptions and scope of corruption by mak-

ing the taxation system more transparent. The cas-

cading effect of the taxes imposed by the centre and

the state would disappear.

IMPACT ON THE SUPPLY CHAIN AND LOGISTICS:

Currently due to the complex tax structure the inven-

tory and the distribution decisions are taken so as to

avoid as much tax as possible. The manufacturers

maintain warehouses in different states to save on

central sales tax imposed on inter-state movement of

goods. This leads to the operational inefficiency. Fur-

ther, the impact of the increase in the number of

warehouses is borne by the end consumer in terms of

cost or they have to sacrifice on quality.

But the GST will bring a common and centralized mar-

ket for the sales of goods and services across the coun-

try. This will increase the operational efficiency of the

supply chain and the benefit will reach to the end con-

sumer as well.

IMPACT ON GDP:

Due to the transfer of major share of indirect tax col-

lected to the centre, state levies multiple indirect taxes

on the goods and services. To avoid this the taxpayers

play with the loopholes in the tax structure and try to

avoid paying the tax, leading to larger number of ex-

emptions. This leads to losses for the government.

But, the implementation of GST would bring in trans-

parency and reduce complexity. It will broaden the tax

base and would redistribute the burden between the

manufacture and service sector. Further, under GST all

the goods and services would be covered and the num-

ber of exemptions would be reduced. And this will gen-

erate more revenue for the government.

13


The current proposal for the implementation of dual GST

The center and state will have their fixed share and

there would not be scope of either unnecessary tax

imposition or tax avoidance. This will bring more in-

vestment, generate more employment and would

promote exports. All this together would add to the

GDP of our country.

IMPACT ON THE MANUFACTURING SECTOR:

As discussed above the manufacturing sector has

been pressed with the extra burden of tax as it pro-

vides the scope for multi-stage taxation. This has

made this sector less attractive for investment.

But the GST would release the ailing manufacturing

sector from the heavy tax burden. This would make

this sector as a profitable option which would spur its

growth. As a result, cost of production will decrease

and export will increase.

IMPACT ON THE PRICE OF GOODS:

In the long run, the price of goods would decrease as

the profit earned in the upper end of the supply chain

would be transferred to the consumers as well.

IMPACT ON THE SYSTEM:

The reform will increase the efficiency of the system

by bringing in transparency. The different sectors

would be treated equally and the consumers would

have to pay the fair price for the goods and services.

The transparency will bring compliance to the govern-

ment norms and would reduce corruption.

For example, in case of the goods manufactured, sup-

pose the consumer pays the GST of 6% while buying

the product. Here the tax amount paid by the consum-

er would be shared by the manufacturers, wholesalers

and retailers equitably based on their cost of manufac-

turing or services.

ANALYSIS- FOR THE FUTURE OF GST

With respect to the prior experience - Implementation

of VAT in 2005-2008:

The implementation of value added tax (VAT) in 2005

had increased the income tax revenue for the govern-

ment of India to 5.9% of GDP in 2008 when compared

to the 3.7% of GDP in 2004. Working on the

14


similar lines of VAT, GST could also reduce the com-

plexities in the tax structure which gives the scope of

corruption. It will bring transparency which will in-

crease the revenue generated from the income tax.

WITH REFERENCE TO OTHER COUNTRIES:

According to the report published by the National

Council of Applied Economic Research, implementa-

tion of GST would increase GDP by 0.9%-1.7%. Canada

experienced 1-2% increase in GDP after the imple-

mentation of GST. On the similar lines, when GST was

introduced in New Zealand in 1987, it increased the

revenue generated from tax by 45%.

Currently, there are 160 countries in the world who

have adopted GST.

WITH RESPECT TO THE BJP’S ELECTION MANIFESTO:

BJP government is strongly in the favor of bringing

transparency in the tax system and the growth and

development of all the sectors of economy. The evi-

dence collected from the implementation of VAT in

India in 2005 and the implementation of GST or VAT in

other countries shows the brighter picture. It reveals

that the centralization of the taxation system and the

single tax rate for both the goods and services would

reduce the complexity and would bring in more trans-

parency. It would reduce the scope of red tape and

tax avoidance or exemptions, which is otherwise pos-

sible in the existing taxation system.

CONCLUSION

To summarize, the implementation of GST would not

have direct impact on the consumers in the short run,

as they have to pay almost same tax for the consump-

tion of goods and services. However, in the long run

the benefits earned by the manufacturers, wholesalers

and the retailers would be passed on to the consumers

and they have to pay lesser on the purchase of goods.

Moreover, the burden on the manufacturing sector will

get reduced as there will be equitable distribution of

tax between the manufacturing and services. This will

encourage investments in the manufacturing sector,

which is currently lagging behind in our country. The

boost in the manufacturing sector will create the col-

lateral benefits like increase in employment, exports,

investments opportunities, FDI etc.

All these factors would together add to the revenue

generated from the indirect tax and would accelerate

the growth of the country.

15


16

CHINESE WALL

It is the communication barrier

that should exist between

different departments of a fi-

nancial institution to avoid any

possible conflict of interest.

For example, if a firm offers both brokering and cor-

porate advisory services, the client should be able to

trust that the sensitive information which it is shar-

ing with the advisory department would not be used

by the brokering department to make undue finan-

cial gains.

INVESTMENT GRADE

It is a rating system that indicates the risk of default

for a bond issued by a company or a sovereign.

There are bond rating agencies such as Standard &

Poor’s, Moody’s and Fitch among others that assign

ratings to corporate, municipal or sovereign bonds.

These ratings correspond to the risk involved in buy-

ing these bonds.

CLUB DEAL

It is a private equity buyout in which the controlling

interest in a company rests with several different

private equity firms. This

group pools its assets togeth-

er and collectively makes the

acquisition. PE firms do this

in order to acquire expensive

companies which they would not have been able to

acquire going alone. Also, it is an effective risk man-

agement strategy since the risk is now distributed.

CONDITIONS PRECEDENT

The set of conditions that a borrower must meet

before he can request that credit facilities be made

available to him. These conditions are a part of the

lending agreement that the borrower might have

with a bank or financial institution.

Fin Lingo


FALLEN ANGEL

It is a security which was once in-

vestment-grade but has since been

downgraded to junk status. Not all

fallen angels are securities of com-

panies headed towards bankrupt-

cy. For example, a company with

strong fundamentals may temporarily lose investor

confidence due to extraneous factors. This may result

in a downgrade of credit rating.

EXCHANGE TRADED FUND

An investment fund that holds stocks, bonds or com-

modities and is traded on an ex-

change like a regular stock. An ETF

tracks an index and tries to replicate

the return provided by it. For exam-

ple, when one buys into an ETF

tracking the Sensex, they are buying into a portfolio

of stocks being traded there. The objective here is not

to outdo the performance of the Sensex but to match

it.

CALL SWAPTION

Call Swaption is a category of op-

tion which gives the owner a right

but not the obligation to exercise

a swap. If exercised the buyer would have the right to

receive a pre-determined fixed interest rate. Swap-

tion is short for call swap option. It is a hedging tool a

buyer might use if he believes the interest rates are

likely to go down.

PITCHBOOK

A book of graphs, charts and market data along with

recommendations for the

market presented to prospec-

tive clients by bankers and

financial institutions. The ob-

jective is to land a mandate to

handle the client’s funds.

MATERIAL ADVERSE CHANGE (MAC)

Material Adverse Change (MAC) is a condition that is

usually included in loan agreements,

providing protection to lenders

against changes that may have a sig-

nificant effect on the business, finan-

cial condition and assets of the bor-

rower. After the occurrence of a

MAC event prior to closing of a deal, lenders usually

reserve the right to modify the interest rate or other

terms of the agreement. For already closed deals,

lenders may refuse any further drawing of cash and

demand immediate debt repayment.

Fin Lingo

17


COVER STORY 14


COVER STORY 19

INTRODUCTION

Election 2014 was a very high voltage affair where

many promises were made by our politicians to bring

the economy back on track. The current government

carries the expectations of a billion plus population to

salvage the economy from the deep economic mess it

is currently in. With this backdrop the Union budget

2014 was tabled on 10th July in Parliament by our Fi-

nance Minister Mr. Arun Jaitley. The Finance Minister

had limited time at his disposal to come up with any

big bang reforms. Nevertheless he was successful in

making some good decisions in the Union Budget. The

Finance minister announced a slew of measures for

correcting the economy in fields of manufacturing,

job creation, education, banking and infrastructure.

So, although the budget measures may not be the big

ticket reforms that people were expecting but these

same measures have the potential to cause transient

but critical changes in the system. Some of the key

measures that the government took could have a very

positive effect on the economy.

MANUFACTURING BOOST

The Budget has specified a number of measures to

rectify the manufacturing sector and bring it back on-

to the growth track. The budget has announced steps

to raise private consumption and make manufactur-

ing industry the future wheel that will drive the econ-

omy. Steps such as extending excise duty cuts on vari-

ous products like auto and consumer durables can

help in raising the private consumption and spruce up

capacity utilisation.

Source: Ministry of Statistics and Programme Imple-

mentation

Infrastructure push in the form of better road connec-

tivity could push the demand of automobiles in our

country thus giving a boost to the industry that has

been in stagnation for the last couple of years. The

biggest advantage of the growth of manufacturing

sector is that the effects are more prominently visible

in the rural areas than the urban areas.

BUDGET ANALYSIS : KYA ACHE

DIN AANE WALE HAI?

BY– SURYANARAYAN PANDA

-IIFT


COVER STORY

So, manufacturing is the best tool to reduce the Urban

-rural income divide.

INFRASTRUCTURE PUSH

A greater thrust on the infrastructure was unmistake-

able in the Union budget. The overall spending for in-

frastructure is budgeted to increase by 24% to

₹210000 crores. The government has allocated ₹7060

crores to setup 100 smart cities. This will not only

boost the infrastructure sector but will also provide

low cost housing options to the millions of poor peo-

ple who cannot afford proper housing.

Source: Ministry of Finance

The Budget has also focussed on ways to fund the In-

frastructure push by setting up of 3P India entity and

Infrastructure bonds. This could create a massive push

for better infrastructure and the direct beneficiaries

would be the Engineering, Procurement and Construc-

tion (EPC) companies. The government has identified

that 40% of Indians do not have basic sanitation facili-

ties and the government has not provided its share of

facilities. The basic infrastructural issues like sewage

drain and access to roads could be addressed in the

Infrastructural push of the government thus improv-

ing the standard of life of average Indians.

INCREASE OF TAX EXEMPTION

The Finance Minister increased the basic tax exemp-

tion rate from the current ₹2 Lac to ₹2.5 Lac for all

individuals. For women and senior citizens between

the age group of 60 to 80 years the basic exemption

rate is increased from ₹2.5 Lac to ₹3.0 Lac. The invest-

ment related deduction under section 80C has also

been increased from ₹1.0 Lac to ₹1.5 Lac. These in-

creased tax exemption rates may cause a revenue loss

of ₹22000 crores to the government. However, the

increased tax exemptions will ensure greater money

with the consumers, thus increasing the disposal in-

come with the general public. This will increase con-

sumption and this will get reflected as higher econom-

ic activities. The indirect beneficiaries of the raising of

tax exemption could be FMCG, consumer durables,

two wheelers companies as well as the housing indus-

try in the form of increased consumption.

EASE OF DOING BUSINESS

Investor sentiment is very important for the accrual

of required investments to fund our economic growth.

Hence, the ease of doing business is a very important

factor that any country should keep in mind. Sadly,

India ranks at 134 out of 189 countries in the Interna-

tional Finance Corporation’s ‘Ease of Doing Business’

index. The Finance Minister has taken a few steps in

this regard to give a fillip to the overall operating envi-

ronment for an investor. These steps should incentiv--

20


COVER STORY 21

-ise value addition, generate income and create more

jobs for an average Indian thus improving the overall

environment for doing business. Moreover it could

also make the Indian investment story attractive for

foreign companies and could attract highly needed

foreign funds.

Source: Ministry of Finance

INCREASE IN FDI IN DEFENCE

The Union budget presented a 12.43% hike in de-

fence budget to 229000 crores of rupees. The Finance

Minister, who also holds the portfolio of the Defence

ministry talked about the important task of indige-

nous production of defense equipments. To boost

home production, the Finance minister hiked the FDI

in the defence sector to 49% from the earlier 26%.

The government has taken a sound decision by de-

linking FDI up to 49% for transfer of state of the art

technology. The primary focus of the government is

to reduce the dependency of the security of the na-

tion on supplies by other countries. Given the large

domestic market and advantage of operating out of

India this new policy could give an impetus to domes-

tic manufacturing of defence equipments by domes-

tic companies. It could also attract those foreign com-

panies that were looking to invest in Indian defence

manufacturing as part of the earlier Defence Offset

Policy.

PUSH TO EMPLOYMENT CREATION

The budget has allocated ₹ 330 crores to set up 6

mega clusters around the country to boost the em-

ployment opportunities in the country. The budget

has also reduced the excise duty in labour intensive

sectors like footwear from 12% to 6% for footwear

priced between ₹500 to ₹1000 and few specific foods

packaging industries from 10% to 6%.


COVER STORY

The small and medium enterprises (SME) sector em-

ploys 8% of all the employees in our country. Giving a

boost to the SMEs of our country, the finance minis-

ter announced a ₹10000 crores fund to back early

stage companies. This is a huge respite for start-ups

in need of money and this will boost their ability to

survive.

Another employee intensive industry that received

good government attention is Tourism. The budget

has proposed to create five tourist circuits at a cost of

₹500 crores and proposed to launch the E-Visa facili-

ty. Such small incremental steps like E-Visa facility for

foreign tourists can create a vast change in the num-

ber of foreign tourists’ arrivals especially when the

number of foreign tourists’ arrival proportionate to

population of our country is one of the lowest in the

world and there is a huge upside to achieve on this

front.

In our country where the working population consti-

tutes 64% of the entire population, tourism and man-

ufacturing are two spheres that could create enough

jobs. Moreover, due to requirement of less invest-

ment in tourism sector, our country can afford to in-

vest and develop this sector. The skill requirements

for an employee working in a manufacturing firm are

far less than the skill requirements of an employee

working in the service sector. Hence, boosting the

manufacturing industry could be a pragmatic way to

create low skilled or middle skilled jobs so that peo-

ple could move away from agriculture related low

paying jobs to better paying manufacturing jobs.

22


TAME INFLATION

The government has encouraged states to allow

setting up of private agriculture market in order to

keep a check on the state sponsored APMCs. This will

increase efficiency in terms of timely delivery of pro-

duce as well as will reduce the food wastage. Key

measures like price stabilisation fund and higher

budgetary allocation for rural infrastructure and

warehousing were announced in the budget that will

improve the supply chain of agriculture products as

well as will ensure the timely arrival of essential sea-

sonal crops like onions etc.

ACHE DIN AANE WALE HAI

The measures undertaken by the government in the

Union budget shows the serious efforts put in by the

government. The measures may be small and incre-

mental but such small measures will go a long way in

transforming our economy locked in low growth and

high inflation. I believe that the government has put its

sincerest efforts in making the budget a pragmatic

budget that touches the life of every Indian in a posi-

tive way and hence I believe that the election promises

of ‘Ache Din Aane Wale Hai’ that was made by our poli-

ticians seem quite plausible.

COVER STORY 23


MR. ARUN JAITLEY BECAME THE FINANCE MINISTER

Mr. Arun Jaitley took over the office of the Finance

minister under the cur-

rent NDA rule in the 16th

Lok Sabha. Mr Jaitley,

who holds a Law degree

from the University of

Delhi, got the plum post

along with the Defence portfolio.

AIRASIA ENTERS INDIA

Asia's biggest low-cost

carrier, the Kuala Lumpur-

based AirAsia, floated a

joint venture with Tata

Sons, the holding compa-

ny of India's largest con-

glomerate, and Telestra

Tradeplace, an investment vehicle of the Bhatia fami-

ly, to launch a new airline in India called as Air Asia

India. AirAsia will have 49% stake, Tatas 30% and

Bhatia will hold 21% in the company, which will be

headquartered in Chennai.

VISHAL SIKKA TO BE THE NEW CEO OF INFOSYS

Infosys appointed its first out-

sider to head the company, hop-

ing new blood will help in its

struggle to stay competitive, as

it tries to evolve from a low-cost

outsourcing company into a

global technology brand. India's second-largest soft-

ware exporter said Vishal Sikka, a veteran of Ger

man software company SAP, will take over as manag-

ing director and chief executive.

FLIPKART ACQUIRES

MYNTRA

Flipkart India Pvt Ltd, the

country’s largest e-

commerce firm, ac-

quired rival Myntra.com

in the largest-ever deal in the country’s e-commerce

market. Though the two Bangalore-based companies

did not disclose the merger amount, analysts’ esti-

mates suggest the cash-and-stock deal is likely to val-

ue online fashion retailer Myntra at more than $330

million.

$100B BRICS FUND TO

TURN CONCRETE IN RIO

The BRICS nations formally

announced the setting up

of a $100-billion fund,

which will help member

countries tide over a cur-

rent account deficit crisis, at their fifth summit in Bra-

zil. China will be the largest donor to this fund and is

expected to contribute around $41 billion. India, Rus-

sia and Brazil will contribute $18 billion each with

South Africa bringing in the remaining $5 billion.

SUBRATA ROY IN TIHAR JAIL

Subrata Roy, the flamboyant chairman of the finan-

cial services group Sahara India Pariwar and owner

TOP FINANCIAL EVENTS OF 2014

24


of properties such as New

York’s Plaza Hotel and a

stake in India’s only For-

mula One racing team,

surrendered to police

after the nation’s top court issued a warrant in a

probe into whether he failed to refund US$3.9 billion

to his depositors.

FLIPKART VALUED AT $7 BILLION

India’s biggest online retailer has

received as much as $1 billion in

fresh capital from its existing inves-

tors including Tiger Global, Naspers and Singapore's

sovereign wealth fund GIC. Singapore's GIC became

the latest investor to put its faith in India's largest

online retailer. The fund raising, the largest-ever by

an Indian start-up and among the largest-ever by any

Internet start-up globally, values Flipkart at over $7

Billion.

TCS AT RS 5 TRILLION

TCS, India’s most valuable company based on market

cap, crossed Rs. 5 lakh crores in market value, a big

achievement considering the tough business environ-

ment it has been operating in. It has also found itself

a berth among the global top five business software

companies. The market value of TCS is more than

that of the next four Indian IT companies combined,

and exceeds that of the other

Tata Group firms put together as

well. Sustained growth momen-

tum over the past four years rel-

ative to peers is the key factor that has kept the

stock buzzing. In addition, a special dividend of ₹40

declared last week has attracted investors.

INDIA BLOCKS WTO DEAL ON TFA

India scuttled the Trade Facilitation Agreement (TFA)

which is part of the Bali

package at the WTO be-

cause it was not satisfied

with the progress on

finding a permanent solu-

tion to the issue of allow-

ing it higher public stockholding of food grains. Last

ditch attempts to meet the 31 July deadline to

make the TFA a WTO rule failed as India did not sup-

port the move. At the heart of the problem is a rule

that caps subsidies to farmers in developing countries

at 10% of the total value of agricultural production,

based on 1986-88 prices. Developing countries com-

plain that the base year is out-dated and that they

need to be provide food security

to the poor.

MICROMAX BEATS SAMSUNG

Home-grown domestic phone

vendor Micromax has unseated Samsung in India as

the top handset seller in the 2nd quarter of 2014. A

study conducted by technology market research firm

Counterpoint Research says that with a 16.6 percent

share of the mobile market, Micromax is followed by

Samsung with a 14.4 percent market share. However,

in the Smartphone segment, Micromax is still placed

second with Samsung holding nearly 25 % market.

25


INTRODUCTION

Shabby interiors, grilled counters, disinterested offi-

cials, ceiling touching files, never ending queues to

spick-and-span offices, open counters and data hun-

gry computers, this has been challenging journey for

banking industry.

Ever since the inception of banking system in India

from the early establishment of Bank of Hindustan in

1770 to its current state; banking system has con-

stantly been evolving. Nationalization of major pri-

vate banks in 1969 was one of the leading milestones

in the history of banking in India that made bank ac-

cessible to unbanked population of India. But the

most significant change was the opening of Indian

economy towards the global economy that brought

the paradigm shift in the banking system in India. Lib-

eralization broke the shackles of the sector which till

then operated in restricted mode. With the arrival of

foreign tech savvy banks, the public sector banks

were forced to restructure the banking operations to

have a competitive edge.

ROLE OF TECHNOLOGY IN CHANGING

THE BANKING INDUSTRY

BY– AVIRAL VERMA &

SANJEEV RANJAN

-IIFT

26


EVOLUTION OF BANKING STRUCTURE

Technology has power to transform the fundamental

economics of any industry and banking is no different.

The banking industry has taken enormous strides with

the use of technology. Most of the banking transac-

tions can now be conducted over the internet. Along

with it, technology has reduced the barriers and

changed the economics of delivery.

KEY MILESTONES IN BANKING INDUSTRY

ATM: Addition of facilities such as fund transfer, bill

payment and account maintenance has reduced the

footfall at the bank branch which has brought down

the operational costs. Branches are now able to cater

more customer base from a single branch. As per

forecasts, ATMs per million populations will increase

from 85 to 170.

Plastic Money- Credit and Debit Cards: The biggest

game changer in the banking industry was the intro-

duction of plastic money. Debit and Credit card pay-

ments through payment gateway revolutionized the

banking sector and provided the individuals hassle

free transactions. Visa, which is a global payment

technology company, processes 47,000 transactions

per second reliably, conveniently and securely. Pres-

ence in 200 countries with $2.2 billion Visa cards and

2.1 million ATM (as of December 31, 2013) it accounts

for a total of 91.6 billion transactions worth $4.5 tril-

lion on 31 March 2014.

NEFT: National Electronic Funds Transfer facilitates

electronically transfer of funds from any branch to

any individual or firm. NEFT has an upper ceiling of

50,000 per transaction.

RTGS: Real time gross settlement system means con-

tinuous settlement of funds by an individual or by an

order within a span of 30 minutes. No upper ceiling in

transaction makes it the most favorable online trans-

fer mode of payment in case of larger transaction.

Mobile banking: Over the years it was felt to have a

technology which goes beyond ATM. In context of In-

dia which boast of a mammoth subscriber base of 900

million mobile users this was even more necessary.

27


Mobile banking initially provided SMS alert facility but

later added services such as account enquiries, bill

payment, and fund transfer and loan requests. This

helped in enhancing customer experience and con-

venience.

CORE BANKING SOLUTIONS

With the arrival of computer and internet, manual

ways found their way out. IT revolution equipped the

banking sector with CORE (centralized online real-

time electronic) banking solutions. It helped in reduc-

tion of operational cost as printing and backup be-

came centralized. CORE banking reduced the man-

power requirement and increased efficiency by reduc-

ing the transaction cycle time. It provided to custom-

er the much required freedom to transact anywhere.

It facilitated accurate and quick implementation of

banking policies. All this helped in increasing business

opportunities which led to reduction in legal expense

and penalties.

Cheque Truncation System: CTS introduced cheque

clearance using MICR. It helped in reducing the turna-

round time in clearing of cheques and curbing cheque

frauds.

ECS Electronic Clearing Service enabled repetitive and

periodic transaction such as interest payment, salary

and pension payment towards electricity, phone and

water payments.

DATA ANALYTICS IN BANKING

Data analytics is the buzz word today. The highly com-

petitive market requires banks to convert vast

amount of data into meaningful information which

could help them in generating sales and differentiated

customer experiences. Banks utilize data analytics to

improve customer retention, cross selling, optimizing

price structure, gain customer insights and implement

real time event management.

Most private banks utilize their business analytics to

fine tune their campaign and marketing efforts. These

analytics provides insight and help to identify new

customers and reduces marketing spend per custom-

ers.

28


Based out of a survey, the graph above shows the rea-

sons why banks implement business intelligence and

analytics.

IT SPENDING IN BANKING SECTOR

The upsurge in spending on IT products by banks is

encouraging and indicative of the emphasis being

placed on technology. Total IT spending in banking

sector across North America, Europe, and Asia-Pacific

will grow to US$188.0 billion in 2014, making an in-

crease of approximately 4.4% over 2013. Indian bank-

ing and securities companies have forecasted to spend

477 billion rupees on IT products and services in 2014,

which amounts to an increase of 12.7 percent over

2013 revenue of 423 billion rupees. Although Europe-

an banks are struggling when it comes to IT spending

as compared to others because of the little growth of

European economy. Still banking IT spending will rise

by .4% in 2013 to $59.5 billion, with spending ex-

pected to stay flat through 2015.

CHALLENGES

Two banks in the Persian Gulf lost $45 million in a few

hours. A British company reported that it lost $1.3 bil-

lion from a single attack. Brazilian banks say their cus-

tomers lose millions annually to cyber fraud.

While banks’ customers have turned tech-savvy and

have started using online banking services and prod-

ucts, evidence indicate that fraudsters are devising

new ways of frauds by exploiting the loopholes in sys-

tems and processes. Customers are being exposed to

Phishing, Watering hole, Pharming and Credit Card

Redirection and different malware based-attacks.

29


FUTURE JOURNEY AHEAD

Bitcoin has emerged strongly as an alternative to con-

ventional internet banking. Marketed as an open

source and decentralized technology, it is finding its

user base at an exponential rate. The inclination to-

wards Bitcoin comes due to the fact that it poses no

restriction on the transaction amount and is free from

bank charges. This is why it has been witnessing in-

creasing acceptance around the globe. It is currently

values at 584 US Dollar/ per Bitcoin

The financial bodies have time and again raised con-

cerns over the use of Bitcoin as a full-fledged tool for

transactions. Currently the user base is quite small,

which limits its use as a normal currency. It is highly

volatile and as a result its value experience high oscil-

lations. Also, the software behind it is still under beta

phase and a major portion is under development.

Rupay: RBI launched India’s first ever domestic card

scheme RuPay on March 2012 with an entry level ac-

ceptance at ATM’s. Its long term aim is to evolve as

an alternative to MasterCard and Visa, but before

that it still has to cover a lot of ground.

CONCLUSION

The pre and post liberalization era has witnessed

huge changes in the banking sector and the advent of

technology in this sector has spread new colors. Now

technology has become the integral part of the bank-

ing sector right from driving the basic banking ser-

vices to the introduction of several new products and

services. It is quite evident that what we see today

won’t stay the same in coming years. Banking indus-

try will keep chasing the fast paced technology for its

betterment.

30


NATIONAL IT CONCLAVE 2014

Theme: THE NEXT BIG THING IN INDIAN IT Date: 30th August, 2014

Venue: Swissotel, Kolkata FEW SPEAKERS AT THE CONCLAVE

SESSIONS

INAUGURAL SESSION - 09:30 to 11:00 am

SESSION 1 – 11:15 am to 12:45 pm

Recharging e-Governance

SESSION 2 – 02:00 to 03.30 pm

SMAC in the Indian context

SESSION 3 – 03:45 to 05:15 pm

Saturation vs Satisfaction


INTRODUCTION

Decisions about the Dividend pay-out by far have

been a subject of great curiosity and interest for the

analysts, researchers and academicians for a long

time now. The objective of the Dividend Pay-out is to

determine the extent to which the company is distrib-

uting the ‘dividends’ to its shareholders out of the

earnings of the company.

Both the investors and the corporate houses were

expecting the abolition of the double taxation on divi-

dend income ever since the Government of India had

initiated financial reforms in 1991. In the budget of

1997, the Finance Minister announced the abolition

of tax on dividend income in the hands of the share-

holders. However, the budget also proposed a new

tax on the companies when they declared, distribut-

ed or paid dividend. This new corporate dividend tax

was also called as Dividend Distribution Tax (DDT).

The main objective of this was to discourage compa-

nies from increasing the dividend outflow significantly

leading to lower capital formation. Even though this

system exempted investors from paying any direct

tax, it required them to pay an indirect tax on the div-

idend at a prescribed rate.

This new system also ensured that the administration

of tax on dividend would be more efficient and effec-

tive. The DDT aimed to improve economic growth

and flexibility by eliminating the tax bias against equi-

ty-financed investments thereby promoting saving

and investment. It also aimed at reducing the tax bias

against capital gains in the earlier tax system encour-

aging investment and enhancing the long term

growth potential of the economy.

DIVIDEND DISTRIBUTION TAX (DDT) & DOUBLE

TAXATION:

There is a common notion that the dividends are

often taxed twice. There is a school of thought that

argues for tax exemption for dividend income. The

basis of their argument is that the taxation of divi-

dend income amounts to double taxation. The expla-

nation behind this concept is that the corporate

profits are subject to corporate tax. Since dividends

are paid out of the profit earned which is already

taxed, if the dividends are taxed again, it amounts to

double taxation.

REFORMS IN DIVIDEND DISTRIBUTION

TAX : IS THE STEP BY GOVERNMENT

TAKEN IN THE RIGHT DIRECTION?

BY– MOHNISH KHAINI

- IIM, SHILLONG

32


This logic can be challenged on two grounds:

There is a legal distinction between the corporation

as an entity and the individual shareholders who own

the company.

Tax rates currently in place were set with the

knowledge that there was taxation at the corporate

and individual level. This means that if there is a mor-

al objection to ‘double taxation’, then, the remedial

action would also require an increase in the corporate

tax rate.

IS IT UNFAIR TO RETAIL INVESTORS?

It’s been over a decade that investors have been argu-

ing that taxing dividend is unfair and it leads to double

taxation. The argument is well grounded in a sense

that dividend is a source of income for the sharehold-

ers and it is distributed after the corporate tax is lev-

ied from the gross earning of the firm. Hence, imposi-

tion of tax on distribution is injustice to them. Howev-

er, is it really an injustice to shareholders?

In my opinion, it does not lead to double taxation.

Why? As per our legal system, a company and its own-

er both are separate entities. Various benefits are ac-

crued to the owners because of this. For example,

when a company faces in a crisis, its owners are not

liable to pay any debt from their pockets. Considering

that, when the gross earnings of a firm are taxed it is

deemed as an income tax paid by the firm and not by

its owners. Moreover, when dividends are taxed,

earnings of owners are taxed. Hence, the argument of

double taxation is definitely fallacious.

REFORMS IN DIVIDEND DISTRIBUTION TAX IN THE

UNION BUDGET 2014 – 15

The reforms brought in by the newly elected govern-

ment with respect to the direct tax will definitely be a

shot in the arm for corporate. However, the only

dampener would be the amendment made in the divi-

dend distribution tax. The amendment made was with

respect to section-115O of income tax.

This section was introduced in income tax act in 1997

which made corporates liable to pay DDT while distrib-

uting profit to the shareholders. The recent amend-

ment in the act will increase the effective dividend dis-

tribution tax as the basis for calculation of tax will be

gross distributable surplus rather than net distributa-

ble surplus.

The difference can be explained by the following ex-

ample:

Let’s assume, in 2013, Infosys made Rs.200 Crore profit

and it distributed the entire profit to its shareholders.

In this case, the DDT that Infosys is subjected to pay

would have been as follows:

Dividend distribution amount: Rs.200 Crore/1.16995 =

Rs.170.95 Crore

(The effective rate of 16.995% includes Education cess

and surcharge as well)

Tax Paid: Rs.170.95*16.995% = Rs.29.05 Crore

33


In contrast, Post amendment, suppose the profit fig-

ures are considered to be same for Infosys as per the

example above, the tax that Infosys has to pay in 2014

would be,

Tax paid: Rs.200 Crore*16.995% = Rs.33.99 Crore

Dividend Distribution Amount: Rs.200 – Rs.33.99 = Rs.

166.01 Crore

Thus this example shows that a minor tweak in the cal-

culation of DDT can result in high income that the gov-

ernment is going to earn from it.

IMPLICATIONS OF CHANGES IN THE DIVIDEND DISTRI-

BUTION TAX

1 - Impact on corporates:

There is an inverse relation between dividend distribu-

tion tax and company’s dividend pay-out ratio. When

dividend distribution tax is higher, companies prefer to

retain most of their earnings for future spending. Re-

tained earnings can be used to invest in high growth

project which will help in following manner:

Need for external financing will be less which will

reduce the cost of capital for the firms.

High growth projects will give an opportunity to firms

to earn more profits which will be reflected in their

share price in the secondary markets.

2 - Impact on shareholders:

Plethora of research has been done on what do small

shareholders prefer: capital gain or cash dividends?

Majority of them claim that shareholders are more

satisfied with capital appreciation than cash dividends.

They do not raise any objection if company retains all

the earning and invest it in high NPV project as it ulti-

mately affects the share price of the company in sec-

ondary market.

Furthermore, if shareholders demand any dividends,

firms can distribute stock dividends in lieu of cash divi-

dends. Stock dividends provide many benefits to both

shareholder and a firm.

It doesn’t enforce tax liabilities on shareholders. Firms

don’t have to share its earnings and can invest in new

projects to expand quickly. Stock dividends provide

more liquidity to the stock in the secondary market.

Hence, this proposed change will hardly be a cause of

concern for the shareholders.

3 - Clientele effect:

Clientele hypothesis claims that certain type of inves-

tors prefer cash dividends since their marginal tax on

dividend is less than their income from other sources.

It is more prevalent in India as compared to the devel-

oped economies.

For example: In

2013, the maximum

salary that Reliance

can give to Mukesh

Ambani, as agreed

by shareholders, is

Rs. 38 crore. But

Mukesh Ambani

withdrew only 15 crore as a salary. However, the

amount he received from cash dividend is massive Rs.

1,240.7 crore. The rationale behind this is that his sala-

ry is taxed at 30% while the earnings through dividends

are taxed only at 15%.

34


The above table shows the dividend earnings of busi-

ness persons in the financial year 2011.

This clearly shows the presence of clientele effect. Top

managers, who have a final say in dividend policy of

the company, have personal advantage in cash divi-

dends which might lead them to incline towards cash

dividends. The proposed change will not limit the gap

completely, but will surely reduce the gap.

CONCLUSION:

Tax is one of the main sources of revenues for the Gov-

ernment. Decisions regarding taxes are always given

paramount importance during the budget since these

decisions set the stage for the economy’s growth dur-

ing the course of the year. Well aware of these intrica-

cies of taxes, the new government, during its maiden

Union Budget has brought in small but effective chang-

es in key policies which would assist in streamlining the

cash flows of its treasury. small tweak in the calcula-

tion of the Dividend Distribution Tax can generate huge

revenues to the government. At the first instance, this

change gives an impression that it is going to play a

spoil sport for the corporates and investors but dwell-

ing deep into this matter, the changes also present an

opportunity for the corporates to look out for better

growth oriented projects and thereby providing share-

holders better returns on their investment by way of

capital appreciation. Hence it can be said that in spite

of having negative aspects, the positive aspects of the

proposed change outweighs the shortcomings of the

same.

Promoter Company FY11 (Rs. Cr)

Azim H Premji Wipro 1345.1

Mukesh Ambani RIL 1240.7

Rahul Bajaj Bajaj 917.4

Anil Agarwal Vedanta 790.2

Keshub Mahindra M&M 312.2

35


WHAT IS EQUITY RESEARCH?

The purpose of investment research is to help inves-

tors decide which asset class – cash and cash equiva-

lents, fixed interest securities, real estate, commodi-

ties, currencies and derivatives amongst others-

would make a good investment. In Equity Research, a

sub-set of investment research, the universe of assets

is limited to stocks. There are two types of profes-

sionals in this field, namely- Sell-side analyst who

work at brokerages and independent equity research

firms, and Buy-side analyst who work for money man-

agement firms and present stock pitches to portfolio

managers.

Source: Moneycontrol

WHAT’S N IT FOR YOU?

InFINeeti from now on launches a new section, called

EQUITY RESEARCH, to this magazine which will solely

be dedicated to publishing an equity research report

on one of the happening stocks of the quarter every

edition. We, acting as a sell-side analyst, through our

reports will give you our recommendations on wheth-

er to BUY, HOLD or SELL the stock.

BUT HOW IS EQUITY RESEARCH DONE?

Before you start investing, it is best that you know

how Equity Research reports are made. Hence, in this

edition, we put forward “A Prelude to EQUITY RE-

SEARCH” so as to get you an understanding of it be-

fore you actually dive into investing.

HOW TO MAKE EQUITY RESEARCH REPORTS?

While doing an Equity Research for a particular share

or stock, the work in itself requires one to split it into

research and then future projections or estimations.

For doing so, the basic framework involves one to un-

derstand the business model of the company, read its

financial statements, use ratio analysis techniques to

compare its financial performance with those of its

closest comparable peers, value it using both intrinsic

(absolute) and relative valuation approaches, and

EQUITY RESEARCH :

A PRECURSOR

36


finally, prepare a complete equity research report

with a recommendation to BUY, SELL or HOLD the

stock at its current price.

Equity Research starts with carrying out the Funda-

mental analysis of the company followed by the ratio

analysis and then finally valuation is done.

FUNDAMENTAL ANALYSIS:

Equity Research and analysis begins with an attempt

to understand the business and financial characteris-

tics of the given company. This implies the analysis of

the industry and the company. To start with, doing

the Fundamental analysis of the company becomes

extremely crucial. When analysing an investment,

Fundamentals of a company are the actual numbers

that cause movements in its stock price. In this case,

the analyst is interested in analysing firm specific data

to have an understanding of the big picture, rather

than looking at the technical aspects of an invest-

ment’s market chart.

One of the two approaches goes into the doing of

Fundamental analysis namely Bottom-Up approach or

Top-Down approach. Bottom-Up approach focuses

primarily on the individual stocks rather than on the

external factors impacting the economy. The Top-

Down approach, on the other hand, is a step wise pro-

cess starting with the analysis of the external environ-

ment using PEST analysis, then examining the industry

of the company using models like Porter’s 5 forces or

Porter’s Diamond depending upon the underlying fac-

tors involved and eventually analysing the company

using the popular SWOT analysis. After doing the

above analysis, the analyst or the investor gets an un-

derstanding on the fundamentals of the company and

can qualitatively give a rating to the company. If fun-

damentals of the company are strong, even if the

market goes wrong, the company will come back to its

position.

A simple framework for understanding the Business

Profile of the company:

FINANCIAL/RATIO ANALYSIS:

Once an overview of the business profile is done, the

financial health of the company is to be looked into.

While analysing the financial profile, one has to critical-

ly look into the aspects of Size, Profitability, Growth

profile, Return on Investment and the Credit profile of

the company. Ratio analysis helps in evaluating various

aspects of a company’s financial performance such as

its efficiency, liquidity, profitability and solvency. This

requires the analysis of the financial statements,

namely the Balance Sheet, Profit & Loss Statement,

and Cash Flows Statement of the company. But the

numbers in the company’s financial statements carry

little meaning in themselves as it doesn’t tell us how

good the business is at converting resources to earn-

ings and this is where the ratios come into help as they

provide meaningful relationships between individual

line items in the financial statements. Another im-

portant aspect of ratio analysis is that the ratios can be

37


compared across different companies within the same

sector or sub-sector to get an overview of the perfor-

mance of the company against its competitors or the

industry as a whole. In the coming editions of our

magazine, we intend to restrict our use of ratio analy-

sis to the finding of ratios that will help us evaluate

five aspects of the company namely its operating per-

formance, activity levels, liquidity position, leverage

and valuation multiples.

Example of important ratios used for Power Industry:

From the above table one can easily do a comparative

analysis of the companies against the important ratios

and approximate an average ratio for the industry.

From this, one can find out how the company is per-

forming in tandem to the industry in general.

The list of important ratios used:

Source: - www.moneycontrol.com (for the year 2011)

VALUATION:

Having done the two analyses, one moves to the last

and the most important aspect of Equity Research

which is Valuation. The final stage in the research of

the target company is finding out what is the compa-

ny’s total worth. As the name goes, valuation is the

process of determining the current worth of the equi-

ty, asset or company. Valuation is the estimation of

an asset’s value based either on variables perceived to

be related to future investment returns (usually cash

flows) or on comparisons with similar assets. It is

needed in not just doing Equity Research but also in a

number of other things like Mergers and Acquisitions,

investment analysis, capital budgeting and many

more. The valuation models are used in making invest-

ment decisions as to which assets are undervalued

Operating

Perfor-

mance

EBITDA

Margin

Return on

Assets

Return on

Equity

Activity

Levels

Asset

Turnover

Inventory

Turnover

Operating

working capi-

tal Turnover

Liquidity

Position

Current

Ratio

Quick Ratio Cash Ratio

Leverage Debt/

Equity

Net Debt/

Equity

Net Debt/

Capital

Stock Val-

uation

Multiples

P/E P/S EV/EBITDA

38

Year 2011 NTPC Power

Grid

Reliance

Power

Face Value 10 10 10

Profitability Ratios

Operating Profit

Margin (%)

27.09 83.85 24.66

Net Profit

Margin (%)

15.57 28.81 55.59

Liquidity And Solvency Ratios

Current Ratio 2.48 1.05 1.94

Quick Ratio 2.23 1.02 2.26

Debt Equity

Ratio

0.76 2.05 0.44


or overvalued. It is through Valuation one can quanti-

tatively rate the company.

Approaches to Valuation as put forth by Aswath Dam-

odaran, professor at NYU Stern:

Intrinsic Valuation: The value of an asset is estimated

based upon its cash flows, growth potential and risk.

The most widely used valuation model here are:

Discounted Cash Flow (DCF)

Dividend Discount Model (DDM)

In a DCF model, the forecasted future cash flows are

discounted to get to the present value. The other valu-

ation method in usage is Dividend Discount Model

(DDM). But this can be used only when the company

pays out dividends. Once the intrinsic value or the fair

value of equity is obtained, it is compared with the

Current Market Price of the share and based on this

the analyst comes to a conclusion whether the stock is

overvalued or undervalued.

Relative Valuation: Estimates the value of an asset by

looking at the pricing of ‘comparable’ assets relative

to a common variable like The above picture indicates

that the Intrinsic price of the equity is more than that

of the Current Market Price which tells us that the

stock is currently undervalued and has potential,

hence should be a BUY.

The tools of equity valuation is used to address a

range of practical problems like judging whether the

securities are fairly valued or under/overvalued, infer-

ring market expectations, evaluating corporate like

events mergers and acquisitions, divestitures, spin-

offs, management buy-outs (MBOs), leveraged recapi-

talizations etc.

Summary of the steps of Equity Research:

Understand the company’s business profile and

do the company and industry analysis

Forecast company’s performance

Select the appropriate Valuation model

Make investment decision based on the funda-

mentals and valuation.

While making an investment decision, both the Funda-

mentals and Valuation of the company matters. Finally

on the basis of the ratings of these two parameters,

investment is made. This above mentioned framework

for doing Fundamental analysis, Ratio Analysis and

finally Valuation is an essential starting point but is by

no means exhaustive. There are many other factors

like the price movements (Technical Analysis) which

are taken into account before making an investment

in the equity.

Now that an overview is given, InFINeeti Team inaugu-

rates the section on EQUITY RESEARCH. Please do look

forward to the next edition so as to start investing…

-BY GAYATHRI BHUVANGIRI, IIFT

39

Current Market Price: Rs. 250

Intrinsic Price: Rs. 262


INTRODUCTION

The total number of acts and regulations governing

the financial sector in India today stands at more

than 60. Most of them are archaic and date back all

the way to the Stone Age. For example- Indian mone-

tary policy’s pillars rest on the Reserve bank of India

Act, 1934. Similarly, the Insurance Act of 1938 gov-

erns the Insurance sector in India .

Table 1: Showing India’s vintage financial laws

Yes, there have been amendments over the years but

those changes have been piecemeal and more stop-

gap than not. The results include regulatory overlaps,

regulatory arbitrage and inconsistencies. It was in this

backdrop that the Government of India constituted

the Financial Sector Legislative Reforms Commission

(FSLRC) in March 2011 to comprehensively review

and recast the legal and institutional structure of the

financial sector in India.

FSLRC committee chairman: - B.N. Krishna

The FSLRC submitted its report in October 2012 and

recommended a complete overhaul of the regula-

tions governing the Indian Financial sector. The Com-

mission recommends a draft “Indian Financial Code”

which eliminates more than 20 of the current 60+

laws governing financial markets in India and merges

some of the most powerful Indian Financial Regulato-

ry bodies into one “Unified Financial Authority” (See

table 2 in the next page).

The powers of the RBI have been curtailed compre-

hensively in the report while most other regulators

have been replaced by a single “super regulator” and

the onus of consumer-protection has been changed

from “caveat emptor” to “caveat vendor”. The report

raises the bar for consumer protection and places the

responsibility of avoiding frauds, or the sale of inap-

propriate products to the consumers, with the ser-

vice provider.

FSLRC: A GAME-CHANGER FOR THE

INDIAN FINANCIAL SECTOR & ITS

STAKEHOLDERS

BY– AMARDEEP KUMAR, IIFT

40

Act/Law Year 1st

incorporated

Public Debt Act 1944

Securities Contract

(Regulation) Act

1956

Indian Coinage Act 1906

FERA/FEMA 1973/1999

Banking Regulation Act 1949


KEY RECOMMENDATIONS & THEIR IMPACTS

Let us discuss the key recommendations of the Com-

mission and their impact on the Indian Financial fir-

mament.

UNIFIED FINANCIAL AUTHORITY (UFA): - One of the

loudest amendments proposed by the Commission is

the formation of a “Unified Financial Authority” re-

placing SEBI, IRDA, PFRDA and FMC (the Forward

Markets Commission). According to the FSLRC, the

incumbent financial regime with multiple sectorial

regulators creates conflicts of interest and leads to

overlaps and gaps in regulation at the same time. For

example- while Ponzi schemes are not regulated by

any agency as of now, Securities market is regulated

by SEBI and RBI both. It makes economic sense and

creates synergy to merge regulatory bodies into one

and remove the problems of inter-regulatory turf-

wars. The FSLRC establishes a new seven agency

model to regulate and control the financial sector in

India.

It will regulate and control all activities of the finan-

cial market other than what is to be regulated by the

RBI. The proposed agency will be carrying out all the

responsibilities of all the existing regulators (other

than the RBI) like SEBI, FMC, IRDA, PFRDA etc. The

UFA will also be the first consumer interest protec-

tion regulator in the financial sector with the excep-

tion of banking and payment systems which will be

under the ambit of the RBI.

ROLE OF RBI: - The RBI gets to keep most of its pow-

ers and continues to guide the nation’s monetary pol-

icy and regulation of its banking industry. It also per-

forms the function of regulation and enforcement of

the payment systems and enforcement of the pro-

posed consumer protection law. However, it loses its

power of managing public debt. Also, its monopoly

over monetary policy formulation is in danger as the

commission proposes that the central government, in

42

Present Regulator To be replaced by ( as per the recommendations of the FSLRC)

RBI RBI ( though with reduced powers)

SEBI

FMC

IRDA

United Financial Agency (UFA)

Securities Appellate Tribunal Financial Sector Appellate Tribunal (FSAT)

Deposit Insurance and Credit

Guarantee Corporation (DICGC)

Resolution Corporation (RC)

Financial Stability Development

Council (FSDC)

It remains as it is.

New entity Debt Management Agency (DMA)

New entity Financial Redressal Agency (FRA)

Table 2: Present and proposed Indian Financial Regulatory Structure


consultation with the RBI Governor, set a monetary

policy target and hold the Central Bank accountable

in case of its failure to achieve these objectives. The

icing on the cake, at least for the Government, is the

fact that the Commission wants the Central bank to

deliver on the monetary policy front by adopting a

Monetary Policy Committee having the Governor as

its Chairman and six other members.

Only one of these members will come from RBI. Of

course the Central Bank can advise the Government

on the appointment of two other members while the

remaining three members will be appointed by the

Government. Thus, the Committee effectively dilutes

the Central Bank’s autonomy on monetary policy

matters of the country. It rather places its faith in a

government which is prone to reducing rates in an

election year and is, otherwise too, gullible to being

populist at the expense of the economy.

Additionally, it places the RBI, and all regulators for

that matter, under judicial review, a step unprece-

dented in the history of India. Dr. Raghuram Rajan

has correctly warned that this provision will result

into constant questioning of regulatory decisions thus

creating paralysis of analysis as regulators will go slow

on decision making. There is also the danger of

shrewd participants in the financial system exploiting

the loop-holes to their own advantage by going for

excessive litigation.

FINANCIAL REDRESSAL AGENCY: - Consumer interest

protection is one of the key concerns of the Com-

mittee. To this effect, the FSLRC recommends the cre

ation of the Financial Redressal Agency (FRA) to

attend to consumer complaints in the financial sector

(except the banking sector) across the nation. The

FRA will replace all sector-specific Ombudsmen pre-

sent now. All financial service providers are required

to set up internal mechanisms for consumer griev-

ance-redressal and to educate the consumer of their

right to seek redressal. If the consumer is unsatisfied

with the appropriate handling of their issues by the

firm, they can approach the FRA.

FINANCIAL SECTOR APPELLATE TRIBUNAL (FSAT): -

Financial Sector Appellate Tribunal (FSAT) is the all-

important pillar proposed by the Committee, for ap-

peals against the actions of the RBI, the FRA and the

UFA. The existing Securities Appellate Tribunal will be

merged into FSAT, to which the consumer can appeal

against all financial sector regulators. FSAT will have

powers of jurisdictional oversight on the actions of

the regulators. This places regulators in a tight spot,

for their decisions are not always based on the surety

of events but more on their likeliness to happen since

they cannot wait for a tragedy to strike before acting

on it and defanging it.

28


Source: - Livemint

FINANCIAL STABILITY AND DEVELOPMENT COUNCIL

(FSDC): - The Financial Stability and Development

Council (FSDC) is the only existing regulator, apart

from the RBI of course, that stays on. It will oversee

the various systemic risks and will suggest ways to

bring them down. The Committee wants to establish

a financial data cell whose primary job will be to look

for the systemic risk in the financial sector and report

the same to its parent body, the FSDC. The FSDC, be-

ing a statutory body, will then measure and manage

the risks in the system. The FSDC will be empowered

to undertake all required interventions for reducing

the systemic risks.

PUBLIC DEBT MANAGEMENT AUTHORITY: - The Pub-

lic Debt Management Authority to manage public

debt is an altogether new institution to manage gov-

ernment’s debt in the proposed regime. A Resolution

Corporation has also been proposed to handle the

resolution of financial firms.

ANALYSIS & CONCLUSION

FSLRC has produced one the most far-reaching re-

ports based on its recommendations and possible

outcomes. Its stress on having a clear framework for

monetary policy-making was what prompted the GoI

to form the “Urijit Patel Committee”. The Commis-

sion’s rap to the service-providers and the regulators

for unfair and not-so-consumer friendly practices may

begin a new era of consumer protectionism in the In-

dian financial sector and may force the authorities to

revisit their approach to the consumer and consider

mending their ways. In proposing to create a Draft

Financial Code for India, the committee has tried to

bring in some fresh air to the laws governing the fi-

nancial sector of this country.

43


In trying to amalgamate various regulators into one

body, it has tried creating the much-needed synergy in

regulation. By proposing to make RBI and other regu-

lators responsible to the parliament, it has tried to

make them answerable to the people of this country.

In increasing the weight of the government in formu-

lating India’s monetary policy, it has tried to bridge

the gap between the country’s

monetary and fiscal policies and has made the govern-

ment further answerable to the people of India. In the

words of Dr. Raghuram Rajan, though he himself is

one of the biggest critic of the committee’s recom-

mendations, “FSLRC report is one of the most im-

portant, well researched as well as well-publicized re-

ports in Indian Financial History. The report’s influ-

ence will be felt for many years to come”. Enough

said.

44


INTRODUCTION

International Financial Reporting Standards (IFRS),

previously known as International Accounting Stand-

ards (IAS), is a set of standards, framework and expla-

nations adopted for preparation and presentation of

financial statements.

In present scenario of globalization and liberalization,

the world has become a small place. Many corporates

in emerging economies are looking to enhance their

access to the global markets to fulfil their need of cap-

ital funding. Thus, it is of paramount importance that

there exists a system or a set of guidelines which is

consistent all across the globe, and here in lies the

importance of IFRS. Many countries have already

moved towards convergence of their respective ac-

counting principles with IFRS, while others are still

passive with their approach.

IFRS IN INDIA

In India, Accounting standards are formulated by Insti-

tute of Chartered Accountants of India (ICAI), through

its Accounting Boards Standard. Thereafter these ac-

counting standards are considered by National Advi-

sory Committee on Accounting Standards (NACAS)

which then recommends it to the Central govern-

ment. At present, 28 Accounting Standards, with cer-

tain differences, have been notified under the Compa-

INTERNATIONAL FINANCIAL

REPORTING STANDARDS (IFRS)

BY- DHAWAL LACHHWANI

- IIFT

45


the Companies Act, 1956.

ICAI, in 2007, commenced the process of develop-

ment of accounting principles which converged with

IFRS. They were to be known as Indian Accounting

Standards (Ind-AS). The move to converge its ac-

counting standards with IFRS, rather than adopting it

outright, is because there exists a wide fundamental

gap between the Indian GAAP and the IFRS.

NEED FOR IFRS IN INDIA

Globalization of Economies - Globalization of Econo-

mies has created the need for a standardized practice

for reporting of important financial documents to

bring more uniformity across the globe.

For Raising Capital from Overseas - Indian Companies

raising capital overseas is a common practice nowa-

days. This requires the financial documents to be

transparent and in a format which is recognized all

over the world

To help MNCs prepare consolidated financial state-

ments- The MNCs, which are operating across various

countries, will find it easier to prepare consolidated

balance sheet once IFRS has been implemented glob-

ally

Better Quality of Information- IFRS mandates exten-

sive disclosures and hence is considered a better tool

for accounting. It is a pro impact accounting system,

which requires all outcomes that have an impact on

company’s finances to be recorded accordingly. It al-

so has very stringent Income recognition rules.

TIMELINE FOR IMPLEMENTING IFRS

India joined the IFRS bandwagon a little late, with

close to 130 countries already aligned to IFRS and

many more in the process. IFRS will be implemented

in India in three phases

Phase One- Phase One involves companies having

revenue of more than Rs.1,000 crores. A deadline of

April 1, 2015 has been set for them.

Phase Two- Phase two will begin from April 1, 2016

and will consist of companies with a turnover of more

than Rs.500cr and less than Rs.1000 crores.

Phase Three- Phase three will be applicable for the

remaining companies (companies having revenue of

less than Rs.500cr). No deadline has been set for it as

of now.

ISSUES AND CHALLENGES

In spite of its visible benefits, implementation of IFRS

in India remains a challenging prospect and is bound

to face certain issues such as:

46


47

AWARENESS ABOUT INTERNATIONAL PRACTICES

IFRS adoption implies that the entire reporting of fi-

nancial statements needs to undergo numerous

changes as mentioned above. A lot of work needs to

be done to bring about an awareness regarding the

impact of IFRS among the users and the various stake-

holders.

NEED FOR TRAINING

Professional accountants’ proficiency with IFRS is

absolutely essential for its implementation. The big-

gest hurdle would be the lack of courses and profes-

sional institutions that impart knowledge about IFRS.

As its full time implementation draws near (2015),

acute shortage of trained IFRS staff is being ob-

served.

BASIS IFRS AS

Principle v/s Rule based

standards

Principle based. The underly-

ing economic substance is the

prime evaluation factor

Generally rule based. Compa-

nies act determine and guide as

to how a transaction is record-

ed

Standards v/s Local Laws International Accounting

Standards take precedence

Local regulations take prece-

dence while preparing financial

statements

Presentation of financial

statements

No prescribed format. Assets

and Liabilities need to be clas-

sified as current and Non-

current

Companies Act and other In-

dustry regulations have defined

prescribed formats

Depreciation of fixed assets Depreciation is an annual

change. Based on the estimat-

ed life of the assets

Useful lives already prescribed

in Schedule II of the Company’s

Act

Cash flow statement Mandatory Mandatory for some. Direct

method for insurance compa-

nies and indirect for other

listed companies

Valuations Provides guidance on how to

measure value of mergers,

acquisitions, take overs and

amalgamations etc.

The guidelines under IAS are

debatable as of now

DIFFERENCES BETWEEN IFRS AND INDIAN ACCOUNTING STANDARDS


48

AMENDMENTS TO THE EXISTING LAWS

There is a huge gap between IFRS and existing laws

such as SEBI regulations, banking laws and regula-

tions and even the New Companies Act (2013).

TAXATION

IFRS convergence would result in a change in most of

the elements present in financial statements, conse-

quently ushering a change in tax liability. The taxation

laws should address the treatment of tax liabilities

that arise on convergence of Indian GAAP and IFRS.

FAIR VALUE

IFRS is a principle based accounting system, which

uses fair value as a parameter for recording most of

the items in financial statements. The use of fair val-

ue will bring a lot of volatility and subjectivity into the

picture. Additionally, a lot of groundwork has to be

done to arrive at a fair value that is agreeable to all.

Furthermore, whether fair value gains and losses

should be computed in calculation of distributable

profits is another debate altogether.

TRAINING & SKILL DEVELOPMENT CHALLENGES

Training and skill development are the critical issues

the government will have to address for successful

IFRS integration. All the stakeholders including inves-

tors, accountants, rating agencies, actuaries and valu-

ation experts would need to develop an understand-

ing of IFRS and its provisions. Educational institutions

will have a big role to play, and academic institutions

must include IFRS in their curriculum and students

must focus on acquiring a strong & deeper under-

standing. The proposed move to Ind-AS is definitely a

step in the right direction and it will positively result

in significant improvements to financial reporting and

corporate governance practices.

CONCLUSION

Ind-AS (converged with IFRS), despite the issues and

challenges, is clearly a must for India, if it is to move

forward and open the economy in true sense to inter-

national investors. The Government of India needs to

become proactive in taking steps to smoothen out

the phasing from Indian GAAP to IFRS.


49

TEAM INFINEETI: What percentage of people, of

those targeted, has actually benefited by schemes for

microfinance designed by NABARD? Are the benefits

sustainable even after the scheme is over?

MR. SATISH: NABARD is an apex organization which

does actual field level financing. In 1990 what NAB-

ARD had realised that existing banking structure was

not sufficient to meet a large number of people who

are outside the existing banking structure and existing

financial products. Hence NABARD formulated a pilot

project called Self Help Group Bank Linkage Program,

where NGOs and other organization formed a group

of 4 people especially women, after which they start-

ed savings till they reach a level of maturity and then

linked to bank branch to give some finance- which

was in small amount and a period which was suitable

to the Self Help Group. So that basically is micro-

finance that was started in India in 91’-92’ in the form

of NABARD project. We just aimed at 500 groups but

it progressed well and it caught imagination of bank-

ers and the government. In ‘ 96 govt. made it a regu-

lar financial activity for all banks, after that time there

was no looking back and the govt supported it. The

RBI also supported unregistered group who can open

their own bank account.

By ’98-‘99 we aimed that at least 1 million groups be

formed and linked to the bank, but the achievement

was that we exceeded in formation of more than 2

million groups, especially with the support of various

state governments. Today, if we take the data of

March 2014 nearly 8 million groups, of which 80-90%

are women, are linked with outstanding credit to all

these groups must be 50k crores. But there are issues

about the benefits that are sustained at the end of

the period, and we have mixed reports from the field.

Nurturing and hand holding support is not continued

after the groups get the first dose of credit and then

sometimes the groups defunct or the group disinte-

grates, but what we get from the report on field is

that sustenance of 45-55% of the group after the

credit is over and problem is in the rest of the groups.

This is what we are concerned and currently dealing

with.

TEAM INFINEETI: How has been the recovery/

repayment and collection of the debtors who have

been provided by microcredit schemes?

EXPERT SPEAKS

MR. P. SATISH

CHIEF GENERAL MANAGER,

NABARD


50

MR. SATISH: I was mentioning about the SHG con-

cept where for recovery and repayment there is no

collateral, but there is a lot of influence of peer

group. However our philosophy & practice has been

that wherever there have been group forming and

nurturing, there has to be a necessarily 100% recov-

ery which have been our experience in 97-98% of

the cases, remaining 2-3% where there has been un-

foreseen circumstances and recovery cannot be

done fully.

But what happened in ‘98-’99, government had

come up with the scheme of SGSY (Swarnajayanti

Gram Swarozgar Yojana) in order to help the SHGs.

This scheme saw a lot of bank support but it saw a

lot of deviation from the original principle of forming

and nurturing of the groups and recovery percentage

was very poor- in the range of 30-40%.Whereas the

groups covered under non-government program

supported good recovery. This happened due to the

dilution of the principles that were previously men-

tioned. You must have heard the crisis in Andhra Pra-

desh in ‘09-’10 in the microfinance movement, that

have also added to the problems of recovery. So the

segments in which you normally expect to have

100% recovery, is now facing problems with regards

to recovery percentage. The only silver lining is that

the SGSY is being replaced by National Rural Liveli-

hood Mission, negativity associated with the govern-

ment will go away and we will be able to bring the

movement back into track.

TEAM INFINEETI: What is the government policy for

the disbursement of funds for NABARD to carry out

activities such as micro financing/microcredit? Does

govt. give a lump sum or does NABARD ask for spe-

cific funds?

MR. SATISH: Most of the work which NABARD does in

this microfinance is of refinancing, which primarily

comes from our own funds. Earlier we had Micro Fi-

nance Development and Equity Fund (MFDEF), for

which the government, RBI and other banks had con-

tributed some nominal value. A lot of amount we

were ploughing back into the MFDEF. The fund does

not exist now, instead a financial inclusion fund exists-

which is also created within NABARD with initial nomi-

nal contribution from government, but more from in-

terest differential we had from other schemes. So

technically speaking neither government provides any

huge funds nor do we ask for specific funds, which we

are generating from our internal activities.

TEAM INFINEETI: How does NABARD interact or col-

laborate with NGO’s? How do you select the NGOs to

work with, and how do you blacklist them?

MR. SATISH: Basically, we look at any organization at

a grass root level and we go through its previous work

at the district level- for which we have our district de-

velopment managers. They know the NGOs in the dis-

trict and their track record very well. After which we

invite the NGOs to participate in our programs. But

whenever there is a case of financial sanction, grant or

a support, we normally look at the financial reports

and statements for the past 3 years, its working, its

governance, structure, and housekeeping along with

its track record in carrying out developmental activi-

ties.

https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CB0QFjAA&url=http%3A%2F%2Fen.wikipedia.org%2Fwiki%2FSwarnajayanti_Gram_Swarozgar_Yojana&ei=qPDlU4TRG8rc8AWVuYHQBw&usg=AFQjCNGvT343mIXq6N5pKuQA9iDr1baf8A&sig2=sUMDLZNICbju4DExpwz1Cg&cad=rja

https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CB0QFjAA&url=http%3A%2F%2Fen.wikipedia.org%2Fwiki%2FSwarnajayanti_Gram_Swarozgar_Yojana&ei=qPDlU4TRG8rc8AWVuYHQBw&usg=AFQjCNGvT343mIXq6N5pKuQA9iDr1baf8A&sig2=sUMDLZNICbju4DExpwz1Cg&cad=rja


51

What we can say is that we are quite liberal and open

to NGOs who are ready to work in the field in an hon-

est and dedicated manner. For the smaller NGOs who

have smaller track record of say less than 5 years, we

give them smaller programs.

As far as the blacklisting is considered especially when

it comes to serious financial irregularities in sanc-

tioned grants or loans which they have not used up

properly, and not returned money or even in some

cases, absconding NGO office bearers such NGOs, we

discuss with the local administration and other agen-

cies and then only initiate the process of blacklisting

them and inform the government about the same.

TEAM INFINEETI: For a perspective into foreign trade-

what incentives does NABARD have for increasing the

export/foreign trade? Does it have special trade relat-

ed schemes?

MR. SATISH: One aspect is about Agri Export Zones

and for banks which are financing in Agri Export Zones

in short term or long term finance. There is a special

refinance scheme which refinances their credits to the

banks in the Agri Export Zone. NABARD also support

banks for refinance, and support export promotion for

agriculture, in terms of grading and processing of

fruits and vegetables & packaging, and credits for ex-

port related documentation. One big area where NAB-

ARD supports is cold storage and other facilities re-

quired for export, including providing freezer vans,

freezing facility etc. All of the schemes are partly sub-

sidised from Ministry of Agriculture and Food Pro-

cessing and partially through loan routed through

NABARD. In other ways we have a lot of promotional

schemes, wherein we transfer technology to farmer to

produce export quality fruits, vegetables and crops.

These include training the farmers, supplying them

with new variety of seed and planting material, plus

enabling them in usage of practices that are accepta-

ble in international standards and certifications re-

quired to fulfil the phyto-sanitary needs. We believe

that only when markets are open for agriculture and

there is free trade then only farmer is benefitted.

TEAM INFINEETI: With a new government having a lot

of expectations from a development standpoint, what

do you thing the new government must do to bring

back India’s growth story back on track and how can

NABARD contribute towards the same

MR. SATISH: We have to realise it that no government

can neglect agriculture as a sector. Though the contri-

bution to the GDP of the nation is only 14% still, 60%

employment is engaged in Agri-related activities. But

as far as present govt. is concerned, what we expect is

to have a lot of market related reforms in prices and

movements. The movement between states should be

enabled to move products in and out quickly. Now

you see the price rise in some commodities- a large

part of this is because of restriction of free movement.

Even basic cereal prices are regulated. If the markets

are freed and there is free entry and exit for suppliers

and buyers in the agricultural markets, and we have

acts such as Agriculture Produce Market


52

Committee Act etc., for which for the last 10 years

there has been no discussion on reforms on the field

level, things can improve quite a lot. To add on we

have the system of fixing the minimum support price

on certain crops and restriction of export on various

goods. So, unless there is a free market as far as agri-

culture produce is concerned- sector will not grow in

this way. The government must bring in reforms so

that everyone benefits- the farmers and the consum-

ers are not taxed with too much price at its doorstep.

TEAM INFINEETI: What, according to you, is the high-

light of the budget and what are the budget’s implica-

tions in the long run?

MR. SATISH: Let me restrict to agriculture related is-

sues of the budget. One thing is that there has been a

creation of 5000cr fund for NABARD; in the last 10-15

years there is a decrease in agriculture capital for-

mation which is necessary for farm mechanization,

irrigation, horticulture etc.

Second thing is the policy on the Joint Liability Group

of landless farmers, of which Rs.5 Lacs will be spon-

sored by the government. Third is the Rs.2000cr fund

(within NABARD) for Agro Processing Unit which has

an important relation with Agro Export that we previ-

ously discussed. This is import from an export point

of view as a lot of it goes to Middle East, Europe etc.

Fourthly, climate change adaptation fund has been

created, which NABARD had initially proposed. NAB-

ARD had implemented a climate change project in

Ahmednagar, Maharashtra to help farmers adapt and

mitigate the impact of climate change. Such initia-

tives have to be taken by the government so that for

the next 5-10 years, climatic changes-be it rise in

temperature or rainfall, it is taken care of.


53

INTRODUCTION

Decision to increase FDI limit in the Insurance Sector

from 26% to 49% by the Government of India is being

hotly debated. The private companies have naturally

welcomed the move seen as giving them a level-

playing field in a sector heavily dominated by state-

invested entities.

Fact is, only 3% of GDP is accounted for by this sector

out of which general insurance accounts for less than

one percent of GDP. This implies huge potential for

future growth in this sector. It has also been pointed

out that this move would bring the much needed long

-term capital in this sector. Benefits to existing com-

panies which are constrained by lack of funds and re-

duced profitability are thus understood. Implications

for the other important stakeholders like the

‘consumers’ are not that obvious. It is being stated by

optimists that new products, more coverage, higher

penetration especially in rural areas are the likely

benefits of this policy change. Question which comes

to one’s mind is whether lack of capital was the only

problem which was plaguing this sector? Is it the pan-

acea of all evils?

In this article we are going to concentrate on health

insurance to understand the present scenario and the

implications of the new policy for this particular sec-

tor. Compared to Life Insurance which has been tradi-

tionally positioned as a tax planning tool, health insur-

ance took a long time to emerge in our country. Espe-

cially, after 1990s when the economy was liberalized

and new ideas came from across the border the sec-

tor took off. And once the sector was opened up for

private participation and the per capita income of the

people increased simultaneously it experienced con-

siderable growth. Between the years 2007 and 2011

the health insurance membership increased to 300

million and is expected to touch 600 million by 2015.

Even after such growth the out-of-pocket expenses

dominate the health care spending estimated at 72%

of total expenses. India’s per capita health care

spending is only $109 compared to the global average

of $863. Hence a lot of potential growth is

FACULTY’S CORNER

WOULD INCREASE IN FDI LIMIT HELP

HEALTH INSURANCE SECTOR IN INDIA?

-BY BIBEK ROY CHAUDHARI

PROFESSOR, IIFT


foreseen given the incidence of diseases in our coun-

try. What are the likely factors that have impeded the

growth of this sector?

ANALYSIS OF INSURANCE SECTOR

Like any other financial services the insurance sector

is also impacted by the problem of asymmetric infor-

mation. It becomes difficult for the insurer to detect

less risky individuals as there is an incentive to hide

details to pay lesser premium on the part of the in-

sured. The problem is more acute in rural areas. The

moral hazard problem also may be high due to the

unholy nexus between the hospital/doctor and the

customer which may give rise to false claims. Given

the state of legal institutions in India the probability

of such events are quite high. On the other hand the

third party agents entrusted with claim settlements

often create problems even in case of genuine cases.

Thus profitability of companies has come down dras-

tically due to such reasons and higher competition

from new entrants. On the other hand the consumers

have faced the music in times of need which has led

to lesser demand for such products. Information re-

garding this kind of incidents spread quickly through

word-of-mouth. Both these reasons limit the growth

of membership among the people aware of the ser-

vices.

Lack of doctors and health care infrastructure has se-

verely limited the access to such services especially in

the rural areas. Most of the people in such areas de-

pend on public health care with serious quality issues.

Whereas the little bit of private care which does exist

is not affordable for most of the people. Multi-layer

care-delivery system creates a problem for the in-

sured as movement across multiple points are re-

quired during each visit. On the other hand due to lax

medical procedures adverse drug related problems

are quite high. In terms of product offerings most of

the insurance providers offer indemnity based prod-

ucts covering critical procedures involving lump sum

payments. This bypasses the other needs of health

care seekers like regular check-ups (preventive health

care), one day procedures, maternity related care etc.

Can FDI solve these problems? Increase in FDI limit

may interest new entrants with new models of deliv-

ery and products. This is required given the supply-

demand mismatch observed in this sector. Moreover,

this would create jobs being a labor-intensive pro-

cess. Intensified competition among players would

increase efficiency of services and directly benefit the

consumers. Knowledge spillovers from international

best practices would enable the service providers to

reach out to more customers.

FACTORS AFFECTING THIS SECTOR

First, major point emphasized in the literature which

deals in FDI in health care is whether the sector is al-

ready commercialized. This is because liberalization of

this sector leads to commercialization and if it

54

Source: www.maculahealthcare.com


55

is not already exposed to such phenomenon the en-

try of foreign money may create ripples for which the

market may not be ready. Since in India we have al-

ready allowed 26% foreign participation with a num-

ber of private players there seems to be room for fur-

ther commercialization and it would be less of a

shock to the system. The greatest impact on health

care financing, distribution of facilities, access to ser-

vices, etc., is thus the degree to which health care is

commercial, not whether it is foreign. Nonetheless

FDI may help

in reducing

financing con-

straints and

increase

health care access in a country like India.

Second, existing regulatory environment, and

‘resilience’, will significantly determine the economic

and health impact of FDI, the effectiveness of safe-

guard measures and the stability of commitments.

Important issue in this case is establishing the likely

balance of ‘power’ between the national regulatory

system and potential investors. Not only might regu-

lations determine the level of FDI, but opening up, or

extending, the commercial sector will require stand-

ards in care to be established and maintained. Thus

we need to determine whether the regulatory regime

will be able to handle (greater) FDI, and if not what

measures need to be enacted to do so. Thus the cur-

rent regulatory regime must be made more effective

in order to attract more FDI. Increasing the limit may

be necessary but not sufficient condition for larger

FDI flows.

Thirdly, commensurate investment in health care in-

frastructure. Lack of proper health care facilities

across locations impacts demand for health insurance

services. A

consumer

would be

inclined

buy an in-

surance

product only when commensurate health facilities are

available within their reach. Public-private partnership

may be the way forward especially in semi-urban and

rural areas. Tremendous scope of medical tourism also

may induce more investments in health care facilities

in countries like ours.

Fourthly, the model for health insurance delivery is

also equally important. Various forms of insurance,

mandatory, voluntary and community health insur-

ance cover approximately one-fourth of India’s popu-

lation. Whether insurance is offered through employ-

ment, purchased voluntarily or sponsored by the gov-

ernment for select populations, all potentially contrib-

ute towards the health systems goal of providing fi-

nancial risk protection and reducing the financial barri-

ers to quality health care. Innovative models based on

mobile devices are being suggested for greater out-

reach. All in all, it can be said that FDI in insurance has

the capability to transform this sector.


56

INTRODUCTION

Populism has acquired a pejorative connotation in

recent times. It has become an adjective of choice to

describe any politician who wants to take the easy

route to popularity via appeasement. However, isn’t

that the point of a democracy? The will of the people

is supposed to be paramount. The problem lies in the

fact that short-term and long-term interests of the

society are often antithetical to each other and one

cannot rely on the masses to provide a logical vision

for the future. Populism has evolved over the last

century as a response to the inequalities inherent in

liberal capitalism. It believes in an expansionary fiscal

policy of the government which increases public em-

ployment, mobilizes the masses and blurs the distinc-

tions between leaders and institutions.

Over the years, Indian polity has thrown up many in-

stances of populist decisions taken without much

thought to economic prudence and rationality. On 29

February 2008, P. Chidambaram, the Finance Minis-

ter of India at that time, announced a debt relief

package for farmers which included the complete

waiver of loans given to small and marginal farmers.

It was called the Agricultural Debt Waiver and Debt

Relief Scheme and the 600 billion rupee package in-

cluded the total value of the loans to be waived for

30 million small and marginal farmers (estimated at

500 billion rupees) and a One Time Settlement

scheme (OTS) for another 10 million farmers

(estimated at 100 billion rupees).

Although the sentiment behind the measure was

laudable – freeing up small agriculturists from the

cycle of debt – the design of this scheme was flawed.

An important feature of the program which has been

heavily criticized is that it covers only formal sources

of credit and excludes any kind of informal loan. So

one side it benefitted wealthy and large-scale farmers

who had access to institutional credit (about 23% of

the total farmers), small and marginal farmers, who

borrow the majority of their funds from private mon-

eylenders, did not benefited from the scheme. Thus

the scheme just ended up straining our public financ-

es while the most deprived farmers remained un-

affected. This was a classic populist scheme.

POPULISM HAS BROKEN THE BACK

OF INDIAN ECONOMY. WHAT’S

WRONG WITH AVOIDING IT?

-BY ASHISH KASHYAP &

SUMIT BHANSALI

SJMSOM, IIT-BOMBAY


57

ELECTIONS ARE THE TARGET

Similarly, just before the 2014 elections, the Govern-

ment of India was considering tweaking the rules for

MGNREGA program wherein the benefits to the

workers would be linked to the inflation rate in or-

der to better target the rural poor. At the end of No-

vember 2013, the Ministry of Rural Development

constituted a new committee to determine a suita-

ble index for the MGNREGA wages on the basis of

which new baseline wages will be fixed for 2014.

Currently the MGNREGA wages are pegged to the

consumer price index (agricultural laborers), or CPI

(AL), which has a large food and beverages compo-

nent.

The committee would assess the merits of using an

alternative measure, such as the consumer price in-

dex (rural areas), or CPI (R), where the food and bev-

erages category is accorded a lower weighting, and

was due to release its report in three months' time,

before the national elections to be held by May

2014. Why this logical step could not have been tak-

en in the years before eludes comprehension?

EXAMPLES OF POPULIST SCHEMES

Electoral politics has become a mechanism to

achieve some sort of redistribution of income every

five years, placating all the special interest groups

that dot the political landscape of India. Over the

years, a pattern seems to have emerged where terri-

torial groups demand special packages (for example,

Bundelkhand) or statehood (for example, Telanga-

na). Most of the Social groups are known to make

community-specific demands, such as reservations

(the recent inclusion of Jats in the Central OBC list),

special status (as in case of minority status to Jains),

or subsidies. Various state governments have also

indulged in offering exclusive benefits to certain spe-

cific communities, like unemployment allowance,

free TV sets, gold ornaments, free computers, etc.

After the DMK announced a string of freebies in its

election manifesto, bête noire AIADMK came out

with its own edition of the sop opera. If the DMK's

manifesto reads like a book about freebies, the AI-

ADMK is also following the course. In fact, AIADMK’s

J. Jayalalithaa has tried to beat her bête noire M.

Karunanidhi at his own game by taking the mad race

to a new level. Ms. Jayalalithaa has in fact promised

to give half a sovereign gold to women awaiting

marriage apart from a cash assistance of Rs.25, 000.

The Maharashtra government, as a final shot before

facing the assembly election, announced a new res-

ervation quota -- 16 percent for Marathas and 5 per-

cent for Muslims. Before this announcement Maha-

rashtra had 52 percent reservations, which crossed

the limit set at 50 percent by the Supreme Court.

With these fresh set of reservations the total


58

reservations in the state has gone up to 73 percent.

Although the decision has been challenged in the ju-

diciary, it is a symptom of a larger problem afflicting

our entire political landscape.

These are direct acts of economic populism which are

easy to diagnose. We must however not ignore the

broader and subtler definition of populism and the

far-reaching implications that it has for the polity of

the country. Populist moves are not just direct eco-

nomic ones all the time; they also entail concessions

to the majority or some special minority, ideologically

suspect measures, appeasement etc. It needs a very

keen analysis to discern these subtle threats to a

more rational governance model. Let’s look a few

contemporary issues which will elucidate our point.

The new Narendra Modi Government has promised

us a lot of initiatives which reek of populism and du-

bitable logic

Interlinking of Rivers: Rivers have a religious, cultur-

al and sentimental value to India and its population.

They are also the lifeblood of the economy. Hence

interlinking of rivers is a highly visible, popular move.

However it is fraught with the possibility of potential

disaster. It is an attempt to change the geography of

the country. When comparisons are made to a na-

tional water grid on the analogy of a “power grid”, it

is extremely misleading. A river is not a human crea-

tion, they are integral components of ecological sys-

tems and inextricable parts of the cultural, social and

spiritual lives of the communities concerned. It is not

quite clear how the linking of rivers will contribute to

the objective of flood control. A significant modera-

tion of floods will call for a massive diversion of flood

waters which may not be feasible at all, or if techni-

cally feasible, it may have serious impacts on the river

regime downstream of the diversion point, on the

diversion route and in the recipient areas. On the

other hand, if only small fractions of the flood flows

are to be diverted (as seems to be the intention),

there will be hardly any flood moderation. For in-

stance, the flow in the Ganga during a high flood can

exceed two million cusecs, whereas the link canals

envisaged will divert only 1,500 cusecs. It is primarily

in the context of drought that the project might ap-

pear to be needed. However the proposed river links

(reportedly mainly by gravity, with a few modest lifts)

are no answer to drought-prone areas. Linking a river

to another will merely provide additional water to

areas already served by rivers.

New IITs, IIMs and AIIMs in every state: While IITs

and IIMs have a very prominent brand value and sig-

nificance to a large section of the population as an as-

pirational goal, this move is extremely illogical. The

current new IITs and newer IIMs already face a re-

source crisis, they have yet to acquire proper campus-

es, enough faculty and are struggling. Instead of in-

vesting more in making sure that they get to


59

similar levels of competency as the older institutes,

this decision aimed at appeasing popular demands is

probably going to add to the woes of our educational

system. The need of the hour is more quality institu-

tions , rather than more institutions.

Bullet Trains: There is no evidence of any urgent

need for bullet trains in India. Since the entire tech-

nology will be imported and limited to a few sections

of the railways, we are also not sure about the bene-

fits of the technology transfer. Meanwhile, we con-

tinue to have train accidents, poor sanitation and

cleanliness in our trains and railway stations and per-

petually delayed trains.

A

more fruitful investment in the network and frequen-

cy of trains in critically overloaded sections would be

much more useful. However Bullet Trains is again a

very visible and populist move, aimed at invoking sen-

timents of chauvinism and national pride.

CONCLUSIONS

It is very clear that the ideology of democracy and

popular will has been immeasurably damaged by the

machinations of unscrupulous politicians. Populist

moves are aimed at exploiting the myopia which the

average citizen exhibits when it comes to long-term

issues. Popular democracy and Populism are not in-

separable. A more aware electorate is the need of the

hour.


60

Summer Internship is an integral part of an individu-

al’s B-School life which equips one with the tools to

be used later in the professional life. It is an enabling

platform where one can learn the nuances and intri-

cacies of one’s desired field. One can get a feel of

how corporate life is going to be after an MBA. More-

over it gives one an opportunity to asses one’s own

capability and relative performance with best of the

students in the country in a dynamic environment.

From the first trimester itself I was very passionate

about finance and always was ready to walk an extra

mile to learn the intricacies associated with it. Thus, I

always had the desire to pursue an internship in the

finance domain. Finally, I had the privilege of doing

my internship with Reserve Bank of India in their Kol-

kata regional office.

The project which I got to work on was “Role of

Treasury in Liquidity Risk Management”. The ap-

proach to my project was two-fold. First I had to

study and understand the nuances of Treasury and

RBI guidelines which govern the policies of banks in

our country. Secondly, I had to analyse the treasury

investments of private sector banks and public sector

banks and then give my suggestions. I feel that fi-

nance subjects in my first year of MBA helped me a

lot in gaining an insight about the general functioning

of RBI and specifically in my project.

The atmosphere in RBI was very vibrant where every-

one from junior level to senior executives were very

enthusiastic about their work , about imparting

knowledge and aiding the interns in their work. I

would say that my learning curve was exponential in

RBI where I learnt various facets of managing risk, got

a rare opportunity to have hands on experience in au-

diting the banks based out of Kolkata on CAMELS –i.e.

Capital Asset Market Earnings Legal and Systems

framework. The investment analysis of my project

was an uphill task where I had to understand the an-

nual reports of various public and private sector banks

and then draw a comparison.

I learnt a lot from my internship where I had to work

on short deadlines, work in different groups and talk

and interact with Chief Financial officers of various

Public sector banks. During the course of my intern-

ship I also appeared for CFA Level 2 exam and the help

and guidance that I got from my mentors and peers in

RBI was hugely beneficial to me. Overall I would say

that it was an internship which involved diligence cou-

pled with equal amount of fun and a lot of learning.

SUMMER INTERNSHIP EXPERIENCE

( RESERVE BANK OF INDIA)

-BY SHUBHAM AGARWAL, IIFT


RBI CUTS SLR RATE BY 50 BASIS POINT According to Mr.

Raghuram Rajan, foreign

reserves come at a cost.

Though he accepts that

higher foreign reserve is

better than lower foreign

reserve, but at the same

time, he also makes it clear that only having foreign

reserve will never buy the immunity for the Indian

economy.

He opines that if something can provide immunity to

the Indian economy, then that is nothing but credible

monetary policy. If we have low fiscal deficit, moder-

ate current account deficit and low inflation people

will want to invest here. To achieve immunity we must

get the status of a developed country. According to

him, it can happen only when the Rupee will go more

international and debt market will become more vi-

brant. That is why RBI gives emphasis on reducing and

controlling inflation so much The Reserve Bank of In-

dia has recently slashed SLR rate by 50 basis points to

22% while CRR (4%) and repo rate (8%) are kept un-

changed.

FLIPKART SIGNED MoU TO PROVIDE TRAINING IN RU-

RAL AREAS

The Retail giant from

India, Bangalore

based Flipkart, has

come forward to ex-

tend help by providing training to rural and semi-

urban people. Flipkart has signed a Memorandum of

Understanding (MoU) for the initiative. They are going

to start the training centres in Agra, Meerut, Varanasi,

Aurangabad, Pochamalli, Salem, Guwahati and Shil-

long. After the training Flipkart may well absorb them

as their employee.

COLD WAR BETWEEN RUSSIA & AUSTRALIA

A cold war has been started

between Russia and Aus-

tarlia which started over

the issue of Russia’s sup-

port to the separatist

movement for Crimea in Ukraine. On one hand Aus-

tralia openly criticised Russia’s stand on the issue, US

along with other G8 countries have been imposing

ban on Russian organizations and individuals since

middle of March 2014. As a consequence Russia has

introduced an embargo on various agricultural

61


62

products like beef, pork, fruit, vegetable, poultry, fish,

milk and number of dairy products from Australia, EU,

US, Canada and others.

JAPAN FOREIGN RESERVES FALLS BY $7.89 BN

Japan’s foreign exchange reserve fell to the lowest for

the past 4 months. At the end of

July Japan’s total foreign exchange

reserve is tallying at $1.28 trillion

which is reduced by $7.89 billion in

the last month. According to finance ministry of Ja-

pan, this happened due to drop in value of foreign se-

curities held by the government because of a slump in

US Treasury bond prices.

SCAM IN BHUSHAN STEEL

CBI has arrested Neeraj Singal, Vice

chairman and Managing Director of

Bhushan steel. The allegation is

that he is involved in a scam of Rs.

50 Lakh which also involves Syndicate Bank. On 2nd

August, the CBI has arrested 6 accused, together with

the Chairman-cum-Managing Director of Syndicate

Bank S K Jain, for allegedly taking bribe of Rs 50 lakh

to increase credit limit of some companies violating

the banking rules. As a result share price of Bhushan

steel has taken a plunge of 10% in BSE.

INFIBEAM PLANNING FOR AN IPO

Ahmedabad based Infibeam Inc, the organisation be-

hind the consumer e-commerce venture called In-

fibeam.com and B2B e-

commerce platform

namely Build A Bazaar,

is going to raise Rs 500-

1,000 crore ($83-166

million) through an Initial Public Offering (IPO) in India

within the next couple of quarters as mentioned by

its founder and CEO Vishal Mehta.

UNIVERSAL COMMODITY EXCHANGE STOPPED

TRADING OPERATIONS ON 16TH JULY 2014

Universal Commodity Ex-

change (UCX): India’s 6th

commodity exchange

which started functioning

on 19th April 2013 has sus-

pended all the trading operations on 16th July 2014. It

was promoted by Commex Technology in joint ven-

tures with IDBI Bank, IFFCO, NABARD and REC. Signs

of fraudulent trade practices have been observed in

the aforementioned exchange by Forward Market

Commission in March. Similar issues were also found

with MCX when a special audit took place under pur-

view of PwC.


63

KNOW ABOUT YOUR COIN!

The latest Indian one rupee coin

which has the highest circula-

tion is made up of Ferritic Stain-

less Steel (FSS), having a diame-

ter of 25mm. It weighs 4.85 gm.

The value of the coin, when

melted is estimated to be 70 paisa. The remaining 30

paisa goes to the government as seigniorage.

NUMBER OF PEOPLE LIVING BELOW THE POVERTY

LINE

A study by BBC shows

that only eight of the

Indian states constitute

poor population of 421

million which is greater

than the poor popula-

tion of 26 poorest countries from Africa, which is 410

million. According to World Bank, over 450 million

people living below the international poverty line of

$1.25 a day.

PREMJI PROMISES TO PAY 50% OF HIS WEALTH FOR

SOCIAL CAUSE

Ten out of the world’s top 150-odd billionaires are

Indians. But only one, Azim Premji, figures in the list

of 105 billionaires

who have pledged to

give away at least

50% of their wealth

for greater social

good. The Azim

Premji Foundation is now ramping up from a staff of

800 to about 5,000 in the next five years. It is check-

ing out B-schools to hire fresh MBAs for leadership

roles. Premji will build the foundation with the same

vision and rigour with which he scaled up Wipro in

the early years.

SWEDEN HAS THE HIGHEST TAX RATE IN THE

WORLD

Sweden has the

highest rate of

Income Tax in the

world. A Swedish

has to pay 56.6%

of his salary as

the income tax.

Sweden is followed by Denmark (55.4%), The Nether-

lands (52%) and Austria (50%). Though they charge a

high rate of tax, still all these taxes are duly utilised to

provide every aspect of social security to the citizens.


COIN MINTING IN INDIA

Government of India has 4 mints each with a long

and distinguished history. Alipore (Calcutta) mint

and Mumbai (Bombay) mints were established in

1829 by British Government. Hyderabad mint was

established in 1903 under patronage of Nizam, later

taken over by GoI in 1950. Noida mint is the latest

one established in 1986. Each mint has special iden-

tification mark on the coin it releases.

Mumbai (Bombay) mint issued coins has a diamond

mint mark under the year of the coin.

Hyderabad mint issued coins has a star mark below

the year mark.

NOIDA mint issued coins has a thick dot just below

the date. Alipore mint leaves no mark in coins.

64

WEIRD TAXES ACROSS THE WORLD:

Google tax in France: Online tech companies need to pay to the government for online advertisements.

Used to support artists and online cultural information centre.

Jock Tax in California: Exclusively sports superheroes have to pay from match fees.

Window Tax in Scotland, England and Great Britain in 18th and 19th century.

Cow flatulence Tax: In Ireland Denmark and other EU nations, cattle owners need to pay as the cattle

produce methane causing global warming.

Beard Tax in Russia: Initiated by Peter the great, one of the most notorious Czars.

Tax deduction on Bribe: In Germany, bribery was legal under few circumstances till 2002.


MEET THE TEAM 65 CREDITS

OUTGOING TEAM

Ankit Tiwari

Ashutosh Deshpande

Sanket Tandon

Sobhit Agarwal

SPECIAL THANKS TO:

Apurva Kulkarni

Kartik Puri

Shubham Agarwal

INCOMING TEAM

Adhiraj Bandhopadhyay

Gayathri Bhuvangiri

Mehul Gehrana

Suryanarayan Panda

FEEDBACK/QUERIES

[email protected]

[email protected]

Published by students of

Indian Institute of For-

eign Trade

New Delhi | Kolkata

ALL RIGHTS RESERVED

ANKIT TIWARI is a software engineer and comes with

a prior work experience in Infosys Limited . He in-

tends to specialize in Finance & Marketing. He

wants to pursue his career in IT & Banking industry.

Additionally, he is an avid reader, likes writing in his

spare time , loves reading newspaper and also loves

playing and watching Cricket .

ASHUTOSH DESHPANDE has completed his graduation

in Computer Engineering from Mumbai University,

post which he has worked with Mahindra Holidays.

He has inclinations towards Finance and Strategy.

Also, he is an avid writer, has written for various

blogs, football sites and magazines on topics ranging

from Politics, Current Affairs to European Football.

SANKET TANDON is a software engineer and has

prior work experience with Infosys Limited. He in-

tends to specialize in Finance and wants to pursue

his career in the same domain. He is an ardent Man-

chester United fan. Apart from following football he

likes to read and travel in his spare time

SOBHIT AGARWAL has completed his B.tech in Elec-

tronics and Communication engineering from NIT

Surat in year 2012. Before joining IIFT ,he worked as

Marketing Manager at Endeavor Careers Pvt. Ltd.

for 12 months. Moreover , he has a keen interest in

finance and wants to pursue a career in the same

domain.

infineeti annual edition- august 2014

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